
1.
Journalize the cumulative effect of the retrospective adjustment on Company K’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 K’s prior year income that would be reported in 2017.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
11,200 | ||||||
4,800 | ||||||
Inventory | 16,000 | |||||
(Record the cumulative effect of pretax income due to change from FIFO to average cost) |
Table (1)
Description:
- Retained Earnings is an equity account. Earnings decreased due to decrease in pretax income due to decrease in cumulative difference out of the change from FIFO to average cost, and a decrease in equity is debited.
- Deferred Tax Liability is a liability account. The obligation to pay taxes has decreased on saved income taxes, due to decrease in cumulative difference. The liability has decreased and a decrease in liability is debited.
- Inventory is an asset account. Since the cumulative difference has decreased due to change from FIFO to average cost flow, inventory has decreased, and a decrease in asset is credited.
Working Notes:
Compute the deferred tax liability amount.
Compute retained earnings amount.
2.
Prepare comparative financial statements for Company K for the year 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 K for the year 2017.
Company K | ||
Comparative Income Statements | ||
For the Years Ended December 31 | ||
2017 |
2016 (As Adjusted) | |
Revenues | $130,000 | $100,000 |
Cost of goods sold | (80,000) | (69,000) |
Gross profit | 50,000 | 31,000 |
Operating expenses | (30,000) | (25,000) |
Income before income taxes | 20,000 | 6,000 |
Income tax expense | (6,000) | (1,800) |
Net income | $14,000 | $4,200 |
Earnings per share: | ||
Net income | $1.40 | $0.42 |
Table (2)
Working Notes:
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.
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 statements of retained earnings of Company K for the year 2017.
Company K | ||
Comparative Statement of Retained Earnings | ||
For the Years Ended December 31 | ||
2017 | 2016 | |
Beginning unadjusted retained earnings | $19,500 | $15,000 |
Less: Adjustment for the cumulative effect on prior years of retrospectively applying the average cost inventory method (net of taxes) | (11,200) | (4,900) |
Adjusted beginning retained earnings | 8,300 | 10,100 |
Add: Net income | 14,000 | 4,200 |
22,300 | 14,300 | |
Less: Dividends | (10,000) | (6,000) |
Ending retained earnings | $12,300 | $8,300 |
Table (3)
Working Notes:
Compute the adjustment value for 2017.
Compute the adjustment value for 2016.
Prepare comparative balance sheets of Company K for the year 2017.
Company K | ||
Comparative Balance Sheets | ||
December 31 | ||
2017 |
2016 (As Adjusted) | |
Assets | ||
Cash | $10,000 | $9,000 |
Inventory | 24,000 | 22,000 |
Other assets | 70,800 | 64,100 |
Total assets | $104,800 | $95,100 |
Liabilities and Shareholders’ Equity | ||
Accounts payable | $4,500 | $3,000 |
Income taxes payable | 6,000 | 1,800 |
Common stock, no par | 82,000 | 82,000 |
Retained earnings | 12,300 | 8,300 |
Total liabilities and shareholders’ equity | $104,800 | $95,100 |
Table (4)
Working Notes:
Refer to Table (2) for value and computation of income tax expense, which is the income taxes payable in 2017.
Compute adjusted inventory value for 2016.
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