On December 31, 2010, before the books were closed, the management and accountan

Question

On December 31, 2010, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three depreciable assets.

**Depreciable asset A was purchased January 2, 2007. It originally cost $540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2010, the decision was made to change the depreciation method from straight- line to sum-of-the-years'-digits, and the estimates relating to useful life and salvage value remained unchanged.

**Depreciable asset B was purchased January 3, 2006. It originally cost $180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $3,000.

**Depreciable asset C was purchased January 5, 2006. The asset's original cost was $160,000, and this amount was entirely expensed in 2006. This particular asset has a 10-year useful life and no salvage value. The straight-line method was chosen for depreciation purposes.

Additional data:

~Income in 2010 before depreciation expense amounted to $400,000.
~Depreciation expense on assets other than A, B, and C totaled $55,000 in 2010.
~Income in 2009 was reported at $370,000.
~Ignore all income tax effects.
~100,000 shares of common stock were outstanding in 2009 and 2010.

INSTRUCTIONS:

Complete the comparative retained earnings statements for Madrasa Inc. for 2009 and 2010. The company had retained earnings of $200,000 at Dec. 31, 2008. **The information I have below is correct, but I don't know how to figure out the other values.

_________________________________________________2010____________2009

Retained earnings, Jan. 1, as previously reported_________?____________$200,000
Add: Error in recording Asset C________________________?________________?
Retained earning, Jan. 1, as adjusted___________________?________________?
Add: Net Income__________________________________$208,700 ___________?
Retained earnings, Dec. 31____________________________?________________?

Explanation / Answer

(a) 1. Depreciation Expense 94,500
Accumulated Depreciation—Asset A 94,500

Computations:
Cost of Asset A $540,000
Less: Depreciation prior to 2010 162,000*
Book value, January 1, 2010 $378,000

*($540,000 ÷ 10) X 3

Depreciation for 2010: $378,000 X 7/28** = $94,500

**[7(7 + 1)] ÷ 2 = 28

2. Depreciation Expense 25,800
Accumulated Depreciation—Asset B 25,800

Computations:
Original cost $180,000
Accumulated depreciation (1/1/10)
$12,000 X 4 48,000
Book value (1/1/10) 132,000
Estimated salvage value 3,000
Remaining depreciable base 129,000
Remaining useful life
(9 years—4 years taken) ÷ 5
Depreciation expense—2010 $ 25,800

3. Asset C 160,000
Accumulated Depreciation—Asset C
(4 X $16,000) 64,000
Retained Earnings 96,000

Depreciation Expense 16,000
Accumulated Depreciation—Asset C 16,000

(b) MADRASA INC.
Comparative Retained Earnings Statements
For the Years Ended

2010 2009
Retained earnings, January 1, as previously reported
$200,000
Add: Error in recording Asset C 112,000*
Retained earnings, January 1, as adjusted $666,000 312,000
Add: Net income 208,700** 354,000***
Retained earnings, December 31 $874,700 $666,000

*Amount expensed incorrectly in 2006 $160,000
Depreciation to be taken to January 1, 2009
($16,000 X 3) 48,000
Prior period adjustment for income $112,000

**Income before depreciation expense (2010) $400,000
Depreciation for 2010
Asset A $94,500
Asset B 25,800
Asset C 16,000
Other 55,000 (191,300)
Income after depreciation expense $208,700

***Net income as reported $370,000
Depreciation—Asset C (16,000)
Net income as adjusted $354,000

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