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ID: 2338945 • Letter: I
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I KNOW THE ANSWERS. CAN YOU PLEASE EXPLAIN HOW TO GET THE ANSWERS. THANK YOU
PART VIII. Income Statement, Comprehensive Income & Retained Earnings Statement (25 POINTS)
Hagen Company is preparing its 2017 annual report. Hagen Company presents one year of financial information on all financial statements. Hagen has had a corporate tax rate of 30% since its inception in 2015. The company’s accountant calculated income from continuing operations (after tax) to be $1,000,000 for 2017, but upon further review is not certain this number is accurate. All amounts listed are pretax unless otherwise noted.
1) Hagen has decided to change from LIFO to FIFO inventory. The following data shows Cost of Goods Sold for each year of operation, under both LIFO and FIFO. Hagen’s 2017 income of $1,000,000 was calculated using LIFO.
Year
COGS under LIFO
COGS under FIFO
2015
$480,000
$460,000
2016
510,000
470,000
2017
630,000
540,000
2) On October 1, 2015, Hagen received $250,000 cash in advance for the sale of a contract to deliver their product in equal monthly quantities over the next five years, beginning in 2016. When Hagen recorded the sale they credited a nominal account, Sales Revenue. No adjusting or correcting entries were made and ABC did not realize the error until after 2017 income from continuing operations was calculated.
3) Hagen purchased a piece of equipment on Jan. 1, 2015 for $200,000 with a $10,000 salvage value and a useful life of 8 years. Hagen uses the double declining balance method for this class of asset. At the end of 2017, Hagen determined that the straight-line method of depreciation was more appropriate for this asset and changed methods. Hagen already used the double declining balance in 2017 method to determine depreciation expense and to calculate income from continuing operations of $1,000,000, but wants the current year’s income statement to reflect the new method. Round to the nearest dollar.
4) In 2017, Hagen had an unrealized loss on Available For Sale securities of $40,000 (pre-tax). This loss was included in income from continuing operations for 2017.
5) Dividends of $120,000 were declared during 2017, to be paid in 2018. The dividends were not included on the income statement for 2017.
a) Prepare a schedule showing the adjustments you need to make to the 2017 Income from Continuing Operations.
Income from Continuing Operations (unadjusted) $ 1,000,000
1.
2.
3.
4.
5.
b. Prepare a Retained Earnings Statement for 2017. Follow intraperiod tax allocation requirement
Year
COGS under LIFO
COGS under FIFO
2015
$480,000
$460,000
2016
510,000
470,000
2017
630,000
540,000
Retained Earnings PART F Balance Sheet Beginning Balance as of Jan. 1, 2017 Cumulative Change in Principle (net of $ Prior Period Adjustment (net of $ Beginning Balance Re-stated: Net Income ('17) Dividends Ending Retained Earnings as of Dec 31, 2017 $3,100,000 tax) tax)Explanation / Answer
1. Schedule showing changes in Income from Continuing Operations
Income from Continuing Operations (Unadjusted-Post Tax) $ 1,000,000
a. Decrease in Inventory Cost due to change of accounting policies
(630000-540000)* (100%-30%) 63,000
b. Correction for sales revenue accounting
250000*1/5*(100%-30%) 35,000
c. Adjustment for Depreciation
(37500-23750)*(100%-30%) 9,625
d. Unrealized Loss on Available For Sale securities to add back
40000*(100%-30%) 28,000
Income from Continuing Operations (Adjusted-Post-tax) 1,135,625
b. Retained Earnings Statement of 2017
Beginning Balance as of Jan 1, 2017 3,100,000
Cumulative Change in Principle for Inventory Valuation
(480000+510000)-(460000+470000)*(100%-30%) 42,000
Prior Period Adjustment for Revenue Accounting, 4 year revenue reversal
(250000*4/5)* (100%-30%) -(140,000)
Adjustment for Change in depreciation method for Year 2016
(50000-23750)* (100%-30%) 18,375
Beginning Balance Re-stated 1st Jan, 2017 3,020,375
Dividends declared -(120,000)
Net Income'17 1,135,625
Ending Retained Earning as of Dec, 2017 4,036,000
Notes:
1. Under Double-Declining Depreciation Method, Depreciation is charged 200% of straight line method and on the value of asset value at the beginning of period. In this case, Year 2016 depreciation will be 200000/8*2= 50000. Year 2017 depreciation (200000-50000)/8*2=37500. Straight Line Depreciation per year =(200000-10000)/8=23750
2. Unrealized loss on Available For Sale securities is not recognzied in financial statements, hence to be excluded.
3. Declaration of Dividends is a balance sheet transaction, hence have no effect on income statement.
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