Recording Indirect Effect of an Accounting Change

Annually, Frontier Company pays a bonus on pretax income of 1% that is paid out to employees. In 2020, a change in method to account for inventory results in a retrospective increase of $504,000 in pretax income of the prior year (2019).

a. Prepare the journal entry for the current year to record the additional bonus payable, assuming it is accrued in 2020.

	Account name	Dr.	Cr.
	CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A
	CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained EarningsPrior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A

b. When and where is this bonus reported in financial statements? Ignore income taxes.

AnswerReport expense in the 2020 income statement and bonus payable on the 2020 balance sheet.Report expense retroactively in the 2019 income statement and bonus payable on the 2020 balance sheet.Report expense retroactively in the 2019 income statement and bonus payable on the 2019 balance sheet.Report expense in the 2020 beginning balance of retained earnings and bonus payable on the 2020 balance sheet.