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    Discuss how the provision for income taxes is computed and reflected in interim financial statement.

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    V Part.

    1- Rensing Company "s December 31 year end financial statements contained the followings errors:

    Dec 31 2007 Dec 31 2008

    Ending Inventory $7,500 understated $11,000 overstated

    Depreciation Expense 2,000 understated

    An insurance premium of $18,000 was prepaid in 2007 covering the years 2007, 2008 and 2009. The prepayment was recorded with a debit to insurance expense.

    In addition, on December 31, 2008, fully depreciation machinery was sold for $9,500 cas , but the sale was not recorded until 2009.

    There were no other errors during 2008,or 2009 and no corrections have been made for nay of the errors.

    What is the total net effect of the errors on the balance of Rensing's retained earnings at December 31, 2008? (Ignore income tax considerations)

    a) Retained earnings understated by $10,000
    b) Retained earnings understated by $4,500
    c) Retained earnings understated by $2,500
    d) Retained earnings understated by $3,500

    2-Change in estimate, change in entity, correction errors.

    Discuss the accounting procedures for and illustrate the following:

    a) Change in estimate
    b) Change in entity
    c) Correction of an error.

    VI-Part

    1- The following information is taken form Ryser Corporation financial statements:

    December 31

    2007 2008

    Cash $90,000 $27,000

    Account Receivable 92,000 80,000

    Allowance for Doubtful accounts (4500) (3100)

    Inventory 155,000 175,000

    Prepaid expenses 7,500 6,800

    Land 90,000 60,000

    Buildings 287,000 244,000

    Accumulated depreciation (32,000) (13,000)

    Pattents 20,000 35,000

    Total Assets $705,000 $611,700

    Account Payable $90,000 $84,000

    Accrued liablilities 54,000 63,000

    Bonds payable 125,000 60,000

    Common stock 100,000 100,000

    Retained earnings 351,000 312,700

    Treasury stock at cost (15,000) (8,000)

    Total Liabilities and Equity $705,000 $611,700

    For year 2008

    Net Income $58,300

    Depreciation Expense 19,000

    Amortization of Patents 5,000

    Cash dividends declared and paid 20,000

    Gain or loss on sale of Patents none

    Instructions:

    Prepare a statement of cash flows for Reyser Corporation for the year 2008 (use the indirect method)

    VII Part:

    2- Interim reporting:

    Interim financial reporting has become an important topic in accounting. There has been considerable discussion as to the proper method of reflecting results of operations at interim dates. Accordingly, the Accounting Principles Board issued an opinion clarifying some aspects of interim financial reporting.

    Instructions:

    A) Discuss generally how revenue should be recognized at interim dates and specifically how revenue should be recognized for industries subject to large seasonal fluctuations in revenue and for long term contracts using the percentage of completion method at annual reporting dates.
    B) Discuss generally how product and period costs should be recognized at interim dates. Also discuss how inventory and cost of goods sold my be afforded special accounting treatment at interim dates.
    C) Discuss how the provision for income taxes is computed and reflected in interim financial statement.

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    Solution Preview

    Please see the attached files.

    V Part.

    1- Rensing Company "s December 31 year end financial statements contained the followings errors:

    Dec 31 2007 Dec 31 2008

    Ending Inventory $7,500 understated $11,000 overstated

    Depreciation Expense 2,000 understated

    An insurance premium of $18,000 was prepaid in 2007 covering the years 2007, 2008 and 2009. The prepayment was recorded with a debit to insurance expense.

    In addition, on December 31, 2008, fully depreciation machinery was sold for $9,500 cas , but the sale was not recorded until 2009.

    There were no other errors during 2008,or 2009 and no corrections have been made for nay of the errors.

    What is the total net effect of the errors on the balance of Rensing's retained earnings at December 31, 2008? (Ignore income tax considerations)

    a) Retained earnings understated by $10,000
    b) Retained earnings understated by $4,500
    c) Retained earnings understated by $2,500
    d) Retained earnings understated by $3,500

    2-Change in estimate, change in entity, correction errors.

    Discuss the accounting procedures for and illustrate the following:

    a) Change in estimate

    A change in an estimate is simply a change in the way an individual perceives the realizability of an asset or liability. Examples of changes in estimate are:
    (1) change in the realizability of trade receiv¬ables,
    (2) revisions of estimated lives,
    (3) changes in estimates of warranty costs, and
    (4) change in estimate of deferred charges or credits.
    A change in accounting estimate is considered affected by a change in accounting principle when a new accounting principle is adopted to reflect an expected change in future economic events. An example would be switching from capitalizing ad¬vertising expenditures to expensing them if the future benefit of the expenditures can no longer be estimated with reasonable certainty.

    b) Change in entity

    Change in reporting entity - this type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods. The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it.

    c) Correction of an error.

    A correction of an error in previously issued financial statements should be handled as a prior-period adjustment. Thus, such an error should be reported in the year that it is discovered ...

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