
1.
Journalize the cumulative effect of the retrospective adjustment of decrease in pretax income, on Company F’s prior year income that would be reported in 2017.
1.

Explanation of Solution
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Journalize the cumulative effect of the retrospective adjustment of decrease in pretax income, on Company F’s prior year income that would be reported in 2017.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
Inventory | 60,000 | |||||
42,000 | ||||||
18,000 | ||||||
(Record the cumulative effect of pretax income due to change from LIFO to FIFO) |
Table (1)
Description:
- Inventory is an asset account. Since the cumulative difference has increased due to change from LIFO to FIFO inventory has increased, the asset account increased, and an increase in asset is debited.
- Deferred Tax Liability is a liability account. The obligation to pay taxes has increased on saved income taxes, due to increase in cumulative difference. The liability increased and an increase in liability is credited.
- Retained Earnings is an equity account. Since earnings increased due to increase in pretax income due to increase in cumulative difference out of the change from LIFO to FIFO, and an increase in equity is credited.
Working Notes:
Compute the deferred tax liability amount.
Compute retained earnings amount.
2.
Prepare comparative income statements of Company F for the years 2016 and 2017.
2.

Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations, and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare comparative income statements of Company F for the years 2016 and 2017.
Company F | ||
Income Statements (Partial) | ||
2017 |
2016 (As Adjusted) | |
Revenues | $230,000 | $225,000 |
Cost of goods sold | (120,000) | (95,000) |
Gross profit | 110,000 | 130,000 |
Operating expenses | (40,000) | (32,000) |
Income before taxes | 70,000 | 98,000 |
Income tax expense | (21,000) | (29,400) |
Net income | $49,000 | $68,600 |
Earnings per share: | ||
Net income | $4.90 | $6.86 |
Table (2)
Working Notes:
Compute cost of goods sold for 2017.
Compute expenses for 2016.
Compute the income tax expense for 2017.
Compute the income tax expense for 2016.
Compute the earnings per share (EPS) for 2017.
Compute the earnings per share (EPS) for 2016.
3.
Prepare comparative statement of retained earnings of Company F for the years 2017 and 2016.
3.

Explanation of Solution
Statement of retained earnings: This statement reports the beginning retained earnings and all the changes which led to ending retained earnings. Net income from income statement is added to and dividends is deducted from beginning retained earnings to arrive at the end result, ending retained earnings.
Prepare comparative statement of retained earnings of Company F for the years 2017 and 2016.
Company F | ||
Statement of Retained Earnings | ||
2017 | 2016 | |
Beginning unadjusted retained earnings | $224,000 | $168,000 |
Add: Adjustment for the cumulative effect on prior years of retrospectively applying the FIFO inventory method (net of taxes) | 42,000 | 29,400 |
Adjusted retained earnings | 266,000 | 197,400 |
Net income | 49,000 | 68,600 |
Ending retained earnings | $315,000 | $266,000 |
Table (3)
Working Notes:
Compute the beginning unadjusted retained earnings value for 2016.
Compute the beginning unadjusted retained earnings value for 2017.
Compute the adjustment value for 2017.
Compute the adjustment value for 2016.
4.
Prepare a note to comparative financial statements discussing the changes and effect of changes on income statements in 2016 and 2017.
4.

Explanation of Solution
Note to financial statements: The company amended the method of
The following is the income statement for the years ended 2016:
Company F | |||
Income Statements (Partial) | |||
For the Years Ended December 31, 2016 | |||
As Originally Reported under LIFO | As Adjusted to FIFO | Effect of Change | |
Revenues | $225,000 | $225,000 | $0 |
Cost of goods sold | (113,000) | (95,000) | 18,000 |
Operating expenses | (32,000) | (32,000) | 0 |
Income before income taxes | 80,000 | 98,000 | 18,000 |
Income tax expense | (24,000) | (29,400) | (5,400) |
Net income | $56,000 | $68,600 | $12,600 |
Earnings per share: | |||
Net income | $5.60 | $6.86 | $1.26 |
Table (4)
Working Notes:
Compute cost of goods sold for original reporting under LIFO.
Compute the income tax expense for original reporting under LIFO.
Compute the earnings per share (EPS) for original reporting under LIFO.
The following is the income statement for the years ended 2017:
Company F | |||
Income Statements (Partial) | |||
For the Years Ended December 31, 2017 | |||
As Computed under LIFO | As Reported under FIFO | Effect of Change | |
Revenues | $230,000 | $230,000 | $0 |
Cost of goods sold | (136,000) | (120,000) | 16,000 |
Operating expenses | (40,000) | (40,000) | 0 |
Income before income taxes | 54,000 | 70,000 | 16,000 |
Income tax expense | (16,200) | (21,000) | (4,800) |
Net income | $37,800 | $49,000 | $11,200 |
Earnings per share: | |||
Net income | $3.78 | $4.90 | $1.12 |
Table (5)
Working Notes:
Compute cost of goods sold for as computed under LIFO.
Compute the income tax expense for as computed under LIFO.
Compute the earnings per share (EPS) for as computed under LIFO.
5.
Explain the effect of 10% bonus of income on net income of 2017.
5.

Explanation of Solution
Recognition of expense: If Company F pays 10% bonus on change in income of $60,000, the expense of $6,000
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