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Question 14

Intermediate Accounting (Kieso)
Found in: Page 1306

Short Answer

Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.

The counterbalancing errors can be offset in 2 weeks, and non-counterbalancing errors offset in the next accounting period.

See the step by step solution

Step by Step Solution

Difference between counterbalancing and non-counterbalancing errors

The counterbalancing errors are those errors that will be offset or corrected over two periods. But on the other hand, non-counterbalancing errors do not offset in the next accounting period.


Counterbalancing Errors- Failure to record accrued wages or prepaid expenses

Non-counterbalancing errors- Failure to capitalize equipment and record depreciation.

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Taveras Co. decides at the beginning of 2017 to adopt the FIFO method of inventory valuation. Taveras had used the LIFO method for financial reporting since its inception on January 1, 2015, and had maintained records adequate to apply the FIFO method retrospectively. Taveras concluded that FIFO is the preferable inventory method because it reflects the current cost of inventory on the balance sheet. The following table presents the effects of the change in accounting principles on inventory and cost of goods sold. Inventory Determined by Cost of Goods Sold Determined by Date LIFO Method FIFO Method LIFO Method FIFO Method January 1, 2015 $ 0 $ 0 $ 0 $ 0 December 31, 2015 100 80 800 820 December 31, 2016 200 240 1,000 940 December 31, 2017 320 390 1,130 1,100 Other information: 1. For each year presented, sales are $3,000 and operating expenses are $1,000. 2. Taveras provides two years of financial statements. Earnings per share information is not required. Instructions (a) Prepare income statements under LIFO and FIFO for 2015, 2016, and 2017. (b) Prepare income statements reflecting the retrospective application of the accounting change from the LIFO method to the FIFO method for 2017 and 2016. (c) Prepare the note to the financial statements describing the change in method of inventory valuation. In the note, indicate the income statement line items for 2017 and 2016 that were affected by the change in accounting principle. (d) Prepare comparative retained earnings statements for 2016 and 2017 under FIFO. Retained earnings reported under LIFO are as follows: Retained Earnings Balance December 31, 2015 $1,200 December 31, 2016 2,200 December 31, 2017 3,070


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