Worked-example setupScope and assumptions
- Cedar Trail and all facts are fictional and supplied for instruction.
- The old and new inventory-cost principles are acceptable for the identified population, and an authorized reviewer has supplied a supported preferability conclusion.
- Full retrospective application is practicable; Years 2 and 3 are comparative periods and Year 2 is the earliest period presented.
- All effects shown are direct; indirect bonus, royalty, covenant, and cash consequences are excluded and routed separately.
- A 25 percent enacted tax rate applies to the bounded direct temporary differences with no other tax complication.
- Weighted-average common shares are supplied and diluted EPS requires a separate period-specific computation.
- Period
- Comparative Years 2 and 3, with cumulative effects through the opening of Year 2
- Units
- US dollars and shares
- Rounding
- Retain full precision; display dollars with commas and EPS to two decimals
Problem
Cedar Trail voluntarily changes the inventory-cost principle used for one stable product family. Both methods are acceptable. The authorized technical- accounting reviewer has supplied a preferability conclusion. The controller wants to post the entire cumulative difference to Year 3 income because “that is when we changed the books.” Reconstruct the comparative reporting instead.
The reporting entity and product population are unchanged. That exclusion is part of the route: revising a principle for the same entity is not a change in the entities whose statements are presented.
Partition the historical effects
Years 2 and 3 are presented. Effects before Year 2 are cumulative:
pre-Year-2 pretax inventory increase $240,000
direct deferred tax liability at 25% (60,000)
opening Year-2 retained-earnings increase $180,000
The $180,000 follows from the two balance-sheet adjustments. It enters opening Year 2 equity and never also enters Year 3 income.
Recast Year 2
The new principle increases Year 2 pretax income by $70,000. Under the bounded tax facts, tax expense increases $17,500 and net income increases $52,500.
| Year 2 pretax income | As reported | Adjustment | Recast |
|---|---|---|---|
| Amount | $620,000 | $70,000 | $690,000 |
With 500,000 weighted-average common shares, the basic EPS effect is $0.105, displayed as $0.11. Recompute diluted EPS from the full Year 2 security file; do not assume the basic adjustment is also diluted.
Recast Year 3
The signed Year 3 pretax effect is $(30,000). Tax expense decreases $7,500 and net income decreases $22,500.
| Year 3 pretax income | As reported | Adjustment | Recast |
|---|---|---|---|
| Amount | $750,000 | $(30,000) | $720,000 |
With 520,000 weighted-average common shares, the basic EPS effect is about $(0.0433), displayed as $(0.04). Using Year 2 or current shares would break the period-specific comparison.
Controls and boundary
The asset, deferred-tax, and equity columns must satisfy the accounting equation at the opening of Year 2. Each year's income and tax effects must roll into corrected ending equity. Cash-flow and note effects are rebuilt from the same signed effect ledger.
This example does not prove preferability, practicability, tax law, or diluted- EPS treatment. Those are supplied or separately reviewed. It proves that the accepted route has been partitioned and recomputed without a current-income or retained-earnings plug.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · accounting change error analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- period effects
- 2 fields
Inspect data
{
"year_2": {
"direct_pretax_adjustment": 70000,
"reported_amount": 620000,
"reported_corrected_amount": 690000,
"tax_rate": 0.25,
"weighted_average_common_shares": 500000
},
"year_3": {
"direct_pretax_adjustment": -30000,
"reported_amount": 750000,
"reported_corrected_amount": 720000,
"tax_rate": 0.25,
"weighted_average_common_shares": 520000
}
}- pre earliest period pretax effect
- 240,000
- pre earliest period tax rate
- 0.25
- proposed current income correction
- 0
- reported correction entry balance difference
- 0
- reported iron curtain amount
- 0
- reported opening equity effect
- 180,000
- reported out of period component
- 0
- reported rollover amount
- 0
- route
- voluntary principle change
Recomputed result
| Measure | Value |
|---|---|
| correction entry balance difference | 0 |
| iron curtain amount | 0 |
| opening equity effect | 180,000 |
| opening tax effect | 60,000 |
| out of period component | 0 |
| rollover amount | 0 |
| year 2 after tax effect | 52,500 |
| year 2 basic eps adjustment | 0.105 |
| year 2 corrected amount | 690,000 |
| year 2 tax effect | 17,500 |
| year 3 after tax effect | -22,500 |
| year 3 basic eps adjustment | -0.0433 |
| year 3 corrected amount | 720,000 |
| year 3 tax effect | -7,500 |