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Chapter 22: Q9E. (page 1310)

Presented below are the comparative income and retained earnings statements for Denise Habbe Inc. for the years 2017 and 2018.

2018 2017 Sales \(340,000 \)270,000 Cost of sales 200,000 142,000 Gross profit 140,000 128,000 Expenses 88,000 50,000 Net income \( 52,000 \) 78,000 Retained earnings (Jan. 1) \(125,000 \) 72,000 Net income 52,000 78,000 Dividends (30,000) (25,000) Retained earnings (Dec. 31) \(147,000 \)125,000

The following additional information is provided: 1. In 2018, Denise Habbe Inc. decided to switch its depreciation method from sum-of-the-years鈥� digits to the straight-line method. The assets were purchased at the beginning of 2017 for \(100,000 with an estimated useful life of 4 years and no salvage value. (The 2018 income statement contains depreciation expense of \)30,000 on the assets purchased at the beginning of 2017.) 2. In 2018, the company discovered that the ending inventory for 2017 was overstated by $24,000; ending inventory for 2018 is correctly stated.

Instructions Prepare the revised retained earnings statement for 2017 and 2018, assuming comparative statements. (Ignore income taxes.)

Short Answer

Expert verified

The Closing balance of retained earnings for 2018 is $167,000 and for 2017 is $101,000.

Step by step solution

01

Comparative Income statement

2018 ($)

2017 ($)

Sales

340,000

270,000

Cost of sales

176,000

166,000

Gross profit

164,000

104,000

Expenses

83,000

50,000

Income before cumulative effect of a Change

81,000

5,400

Cumulative effect on prior years

15,000

Net Income

96,000

54,000

02

Statement of retained earnings

Comparative retained earnings statement:

2018 ($)

2017 ($)

Retained earnings, Jan 1

101,000

72,000

Net income

96,000

54,000

Dividends

-30,000

-25,000

Retained Earnings, Dec 31

167,000

101,000

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Most popular questions from this chapter

Holder-Webb Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015鈥�2017. Net Income Computed Using Average-Cost Method FIFO Method LIFO Method 2015 \(15,000 \)19,000 $12,000 2016 18,000 23,000 14,000 2017 20,000 25,000 17,000 Instructions (Ignore all tax effects.) (a) Prepare the journal entry necessary to record a change from the average-cost method to the FIFO method in 2018. (b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle. (c) Assume Holder-Webb Company used the LIFO method instead of the average-cost method during the years 2015鈥� 2017. In 2018, Holder-Webb changed to the FIFO method. Prepare the journal entry necessary to record the change in principle.

Which of the following is not classified as an accounting change by IFRS?

(a) Change in accounting policy.

(b) Change in accounting estimate.

(c) Errors in financial statements.

(d) None of the above

(Change from Fair Value to Equity) On January 1, 2017, Beyonce Co. purchased 25,000 shares (a 10% interest) in Elton John Corp. for \(1,400,000.

At the time, the book value and the fair value of John鈥檚 net assets were \)13,000,000. On July 1, 2018, Beyonce paid \(3,040,000 for 50,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John鈥檚 identifiable assets net of liabilities was equal to their carrying amount of \)14,200,000. As a result of this transaction, Beyonce owns 30% of John and can exercise significant influence over John鈥檚 operating and financial policies.

John reported the following net income and declared and paid the following dividends.

Net Income Dividend per Share

Year ended 12/31/17 \(700,000 None

Six months ended 6/30/18 500,000 None

Six months ended 12/31/18 815,000 \)1.55

Instructions

(Any excess fair value is attributed to goodwill.) Determine the ending balance that Beyonce Co. should report as its investment in John Corp. at the end of 2018

Analysis of Various Accounting Changes and Errors) Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise.

1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts.

2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information.

3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with 鈥淩etirement benefits鈥� on the income statement.

5. Correction of a mathematical error in inventory pricing made in a prior period.

6. A change from presentation of statements of individual companies to presentation of consolidated statements.

7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially.

8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Instructions Identify the type of change that is described in each item above and indicate whether the prior year鈥檚 financial statements should be recast when presented in comparative form with the current year鈥檚 financial statements

The management of Utrillo Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Utrillo changed its method of pricing inventory from last-in, first-out (LIFO) to average-cost in 2017. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method.

UTRILLO INSTRUMENT COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED MAY 31 2013 2014 2015 2016 2017 Sales鈥攏et \(13,964 \)15,506 \(16,673 \)18,221 \(18,898 Cost of goods sold Beginning inventory 1,000 1,100 1,000 1,115 1,237 Purchases 13,000 13,900 15,000 15,900 17,100 Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369) Total 12,900 14,000 14,885 15,778 16,968 Gross profi t 1,064 1,506 1,788 2,443 1,930 Administrative expenses 700 763 832 907 989 Income before taxes 364 743 956 1,536 941 Income taxes (50%) 182 372 478 768 471 Net income 182 371 478 768 470 Retained earnings鈥攂eginning 1,206 1,388 1,759 2,237 3,005 Retained earnings鈥攅nding \) 1,388 \( 1,759 \) 2,237 \( 3,005 \) 3,475 Earnings per share \(1.82 \)3.71 \(4.78 \)7.68 \(4.70 SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD FOR THE YEARS ENDED MAY 31 2012 2013 2014 2015 2016 2017 \)1,010 \(1,124 \)1,101 \(1,270 \)1,500 $1,720

Instructions Prepare comparative statements for the 5 years, assuming that Utrillo changed its method of inventory pricing to average-cost. Indicate the effects on net income and earnings per share for the years involved. Utrillo Instruments started business in 2012. (All amounts except EPS are rounded up to the nearest dollar.)
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