
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 2020.
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 2020.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
Inventory | 60,000 | |||||
47,400 | ||||||
12,600 | ||||||
(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.
Deferred tax liability = Pretax amount × Income tax rate=($42,000+$18,000)×21%=$60,000×21%=$12,600
Compute retained earnings amount.
Retained earnings = Pretax amount × (1–Income tax rate)=($42,000+$18,000)×(1–21%)=$60,000×79%=$47,400
2.
Prepare comparative income statements of Company F for the years 2019 and 2020.
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 2019 and 2020.
Company F | ||
Income Statements (Partial) | ||
2020 |
2019 (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 | (14,700) | (20,580) |
Net income | $55,300 | $77,420 |
Earnings per share: | ||
Net income | $5.53 | $7.74 |
Table (2)
Working Notes:
Compute cost of goods sold for 2020.
Cost of goods sold = {Revenues–Operating expenses–Reported income before taxes under LIFO}=$230,000–$40,000–$70,000=$110,000
Compute expenses for 2019.
Cost of goods sold = {Revenues–Operating expenses–Reported income before taxes under FIFO–Decrease in cost of goods sold}=$225,000–$32,000–$80,000–$18,000=$95,000
Compute the income tax expense for 2020.
Income tax expense = Reported income before taxes × Income tax rate=$70,000×21%=$14,700
Compute the income tax expense for 2019.
Income tax expense = Adjusted income before taxes × Income tax rate=$98,000×21%=$20,580
Compute the earnings per share (EPS) for 2020.
EPS = Net income – Preferred dividendsWeighted average common shares outstanding =$55,300–$010,000 shares=$5.53
Compute the earnings per share (EPS) for 2019.
EPS = Net income – Preferred dividendsWeighted average common shares outstanding =$77,420–$010,000 shares=$7.74
3.
Prepare comparative statement of retained earnings of Company F for the years 2020 and 2019.
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 2020 and 2019.
Company F | ||
Statement of Retained Earnings | ||
2020 | 2019 | |
Beginning unadjusted retained earnings | $252,800 | $189,600 |
Plus: Adjustment for the cumulative effect on prior years of retrospectively applying the FIFO inventory method (net of taxes) | 47,400 | 33,180 |
Adjusted retained earnings | 300,200 | 222,780 |
Net income | 55,300 | 77,420 |
Ending retained earnings | $355,500 | $300,200 |
Table (3)
Working Notes:
Compute the beginning unadjusted retained earnings value for 2019.
Beginning unadjusted retained earnings} = {(Reported income before taxes prior to 2019) × (1–Income tax rate)}=$240,000×(1–21%)=$189,600
Compute the beginning unadjusted retained earnings value for 2020.
Beginning unadjusted retained earnings} = {(Retained earnings balance in 2019+(Reported income before taxes prior in 2019×(1–Income tax rate)))}=$189,600+($80,000 ×(1–21%))=$189,600+63,200=$252,800
Compute the adjustment value for 2020.
Retained earnings = Pretax amount × (1–Income tax rate)=($42,000+$18,000)×(1–21%)=$60,000×79%=$47,400
Compute the adjustment value for 2019.
Adjustment value = Pretax amount × (1–Income tax rate)=$42,000×(1–21%)=$33,180
4.
Prepare a note to comparative financial statements discussing the changes and effect of changes on income statements in 2019 and 2020.
4.

Explanation of Solution
Note to financial statements: The company amended the method of
The following is the income statement for the years ended 2019:
Company F | |||
Income Statements (Partial) | |||
For the Years Ended December 31, 2019 | |||
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 | (16,800) | (20,580) | (3,780) |
Net income | $63,200 | $77,420 | $14,200 |
Earnings per share: | |||
Net income | $6.32 | $7.74 | $1.42 |
Table (4)
Working Notes:
Compute cost of goods sold for original reporting under LIFO.
Cost of goods sold = {Revenues–Operating expenses–Reported income before taxes under LIFO}=$225,000–$32,000–$80,000=$113,000
Compute the income tax expense for original reporting under LIFO.
Income tax expense = Adjusted income before taxes × Income tax rate=$80,000×21%=$16,800
Compute the earnings per share (EPS) for original reporting under LIFO.
EPS = Net income – Preferred dividendsWeighted average common shares outstanding =$63,200–$010,000 shares=$6.32
The following is the income statement for the years ended 2020:
Company F | |||
Income Statements (Partial) | |||
For the Years Ended December 31, 2020 | |||
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 | (11,340) | (14,700) | (3,360) |
Net income | $42,660 | $55,300 | $12,640 |
Earnings per share: | |||
Net income | $4.27 | $5.53 | $1.26 |
Table (5)
Working Notes:
Compute cost of goods sold for as computed under LIFO.
Cost of goods sold = {Cost of goods sold as reported under FIFO+Excess of LIFO cost of goods sold over FIFO cpst of goods sold}=$120,000+$16,000=$136,000
Compute the income tax expense for as computed under LIFO.
Income tax expense = Income before taxes × Income tax rate=$54,000×21%=$11,340
Compute the earnings per share (EPS) for as computed under LIFO.
EPS = Net income – Preferred dividendsWeighted average common shares outstanding =$42,660–$010,000 shares=$4.27
5.
Explain the effect of 10% bonus of income on net income of 2020.
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 ($60,000×10%) would be recognized by Company F as an expense in the year Company F adopts the change in accounting principle from LIFO to FIFO, in 2020. This is an indirect effect of a change in accounting principle because the prior year income is effected by change in elements of income like bonus. The indirect effect is accounted for by prospective method, and hence, the net income of 2018 and 2019 would not be affected.
Want to see more full solutions like this?
Chapter 22 Solutions
Intermediate Accounting: Reporting and Analysis - With Access
- Determine the expected profit or lossarrow_forwardThe following data were taken from the accounts of Burnside Bedknobs, a retail business. Determine the gross profit. Sales Sales returns and allowances $ 1,16,900 1,100 Sales discounts 400 Merchandise inventory, January 1 30,000 Purchases during the period 1,00,000 Purchases returns and allowances during the period 2,000 Purchases discounts taken during the period 2,800 Freight-in on merchandise purchased during the period 1,500 Merchandise inventory, December 31 50,000arrow_forwardWhat is Everest Industrial solutions net income for the year on these general accounting question?arrow_forward
- Sunrise Manufacturing has a Textile Division with the following financial details: • Sales: $320,000 • Cost of Goods Sold: $150,000 Operating Expenses: $75,000 Average Invested Assets: $1,500,000 • Hurdle Rate: 10%arrow_forwarddo not use ai solution given answer General accountingarrow_forward??!!arrow_forward
- Smith Enterprises started the year with total assets of $300,000 and total liabilities of $120,000. During the year, the business recorded $250,000 in revenues, $140,000 in expenses, and dividends of $50,000. Stockholders' equity at the end of the year was: A. $240,000 B. $180,000 C. $200,000 D. $130,000arrow_forwardDeltacorp Manufacturing is developing direct labor standards. The basic direct labor wage rate is $12.50 per hour. Employment taxes are 8% of the basic wage rate. Fringe benefits are $3.80 per direct labor hour. The standard rate per direct labor-hour should be: a. $6.75 b. $5.80 c. $12.50 d. $17.30arrow_forwardanswer ?? General accounting questionarrow_forward
- What is the cost of goods sold on these financial accounting question?arrow_forwardOrion Textiles Ltd. needs to estimate its total overhead costs for the next fiscal year. The actual machine hours and total overhead costs for the past six months are: January: $8,200 total overhead, 2,500 machine hours • February: $8,600 total overhead, 2,700 machine hours • March: $7,900 total overhead, 2,300 machine hours • April: $7,500 total overhead, 2,100 machine hours May: $8,000 total overhead, 2,400 machine hours June: $8,300 total overhead, 2,600 machine hours Using the high-low method, what is the variable overhead cost per machine hour?arrow_forwardKindly help me with accounting questionsarrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningIndividual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT

