Problem 3 - Accounting for changes and error corrections; full disclosures Dyke Company Inc. sells computing equipment and also provides consulting service. Its net incomes for the past three years are presented below. Dyke has NOT closed its 2020 accounting books. 2018 2019 2020 Net $430,000 $550,000 $620,000 Income The following accounting changes and/or errors are noted for Dyke in 2020. A. Dyke has accounted for its long-term consulting contracts using the completed contract method prior to 2020. In 2020, it changed to the percentage-of-completion method. The following shows the differences of net income under the two methods for Dyke's long-term consulting contracts in the prior years. Dyke has reported its net income under the percentage of completion contract method (the new method) in 2020. 2018 2019 $250,000 $107,000 Percentage of completion (new method) Completed contract (old method) Differences $90,000 $180,000 160,000 (73,000) B. In reviewing its warranty policy on equipment, Dyke decided to change its estimates on warranty repairs. In prior years, Dyke estimated 2% of its total sales would be returned for warranty repairs. As a result, the company has recorded warranty expense and estimated warranty liabilities of $90,000 under the old 2% estimate in 2020. In the review, Dyke has determined that 3% of total sales is a more appropriate estimate for warranty expense. Under the new 3% estimate, the company would have recorded $31,000 more warranty expense and estimated warrant liabilities than that under the old 2% in 2020. C. Dyke found that it failed to record prepaid insurance expense of $28,500 in 2018, which understated its insurance expense and overstated its prepaid insurance expense by $28,500 in 2018. Instructions 1. Identify (1) what type of accounting change or error that each of the above item is; and (2) the accounting approach to Instructions 1. Identify (1) what type of accounting change or error that each of the above item is; and (2) the accounting approach to treat each item. 2. Prepare journal entries to report the above accounting changes and/or correct the errors in 2020. Ignore taxes. (Hint: a total of three journal entries.) 3. Considering the effects of the above items, restate the company's income statements for 2018-2020 by completing the following table. Ignore taxes. Comparative Income Statements 2018 2019 2020 430,000 550,000 620,000 Net Income (unadjusted) Adjustments Net Income (adjusted) 4. Considering the effects of the above items, report any cumulative effects on Dyke's beginning retained earnings balance. Specifically, Dyke reported unadjusted retained earnings of $1,260,000 at January 1, 2020. (1) calculate the adjusted retained earnings at January 1, 2020. (2) During 2019, Dyke paid $100,000 cash dividend. Calculate Dyke's retained earnings at the end of 2020. Ignore taxes. Show the calculation for any partial credits. 5. In addition to prepare its financial statements, list two other information Dyke can or should provide under the full disclosure principle. 6. Assuming Dyke closed its 2020 accounting book on December 31, 2020 and issued its financial statements on February 28, 2021. The company issued $10 par value stock for $30 per share on January 30, 2021. Should the company report this post-balance sheet event in its 2020 financial statements and how? Problem 3 - Accounting for changes and error corrections; full disclosures Dyke Company Inc. sells computing equipment and also provides consulting service. Its net incomes for the past three years are presented below. Dyke has NOT closed its 2020 accounting books. 2018 2019 2020 Net $430,000 $550,000 $620,000 Income The following accounting changes and/or errors are noted for Dyke in 2020. A. Dyke has accounted for its long-term consulting contracts using the completed contract method prior to 2020. In 2020, it changed to the percentage-of-completion method. The following shows the differences of net income under the two methods for Dyke's long-term consulting contracts in the prior years. Dyke has reported its net income under the percentage of completion contract method (the new method) in 2020. 2018 2019 $250,000 $107,000 Percentage of completion (new method) Completed contract (old method) Differences $90,000 $180,000 160,000 (73,000) B. In reviewing its warranty policy on equipment, Dyke decided to change its estimates on warranty repairs. In prior years, Dyke estimated 2% of its total sales would be returned for warranty repairs. As a result, the company has recorded warranty expense and estimated warranty liabilities of $90,000 under the old 2% estimate in 2020. In the review, Dyke has determined that 3% of total sales is a more appropriate estimate for warranty expense. Under the new 3% estimate, the company would have recorded $31,000 more warranty expense and estimated warrant liabilities than that under the old 2% in 2020. C. Dyke found that it failed to record prepaid insurance expense of $28,500 in 2018, which understated its insurance expense and overstated its prepaid insurance expense by $28,500 in 2018. Instructions 1. Identify (1) what type of accounting change or error that each of the above item is; and (2) the accounting approach to Instructions 1. Identify (1) what type of accounting change or error that each of the above item is; and (2) the accounting approach to treat each item. 2. Prepare journal entries to report the above accounting changes and/or correct the errors in 2020. Ignore taxes. (Hint: a total of three journal entries.) 3. Considering the effects of the above items, restate the company's income statements for 2018-2020 by completing the following table. Ignore taxes. Comparative Income Statements 2018 2019 2020 430,000 550,000 620,000 Net Income (unadjusted) Adjustments Net Income (adjusted) 4. Considering the effects of the above items, report any cumulative effects on Dyke's beginning retained earnings balance. Specifically, Dyke reported unadjusted retained earnings of $1,260,000 at January 1, 2020. (1) calculate the adjusted retained earnings at January 1, 2020. (2) During 2019, Dyke paid $100,000 cash dividend. Calculate Dyke's retained earnings at the end of 2020. Ignore taxes. Show the calculation for any partial credits. 5. In addition to prepare its financial statements, list two other information Dyke can or should provide under the full disclosure principle. 6. Assuming Dyke closed its 2020 accounting book on December 31, 2020 and issued its financial statements on February 28, 2021. The company issued $10 par value stock for $30 per share on January 30, 2021. Should the company report this post-balance sheet event in its 2020 financial statements and how