Chapter 22: Question 15 (page 1306)
Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.
Financial statements are the written records that show financial information, and the errors can be handled by adjusting the beginning balance of retained earnings
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Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries.
Investment in Martin
1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000
12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000
12/31/16 Share of income 510,000
On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.
Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400
At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.
Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?
(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).
(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.
Briefly describe some of the similarities and differences between GAAP and IFRS with respect to reporting accounting changes.
Simmons Corporation owns stock of Armstrong, Inc. Prior to 2017, the investment was accounted for using the equity method. In early 2017, Simmons sold part of its investment in Armstrong, and began using the fair value method. In 2017, Armstrong earned net income of \(80,000 and paid dividends of \)95,000. Prepare Simmons’s entries related to Armstrong’s net income and dividends, assuming Simmons now owns 10% of Armstrong’s stock.
Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.
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