At the beginning of 2010 a company had retained earnings of $1,500,000. During 2

Question

At the beginning of 2010 a company had retained earnings of $1,500,000. During 2010, the company reported income from cont. ops before taxes of $400,000. The following additional transactions occurred in 2010 but were not included in the $400,000. Assume all of the following were material.

1. At the beginning of 2008, the company purchased a machine for $10,000 that they expensed during 2008. The company would normally have used the straight-line depr. method with a $1,000 salvage value and 10 yrs useful life. This was discovered as the accountant was reviewing the info for the 2010 financial statements. Depr expense on this machine for 2010 was not included in the $400,000 above.

2. Had a gain on sale of a plant asset of $5,000 (pre-tax).

3. Had an uninsured flood loss of $50,000 (pre-tax) which was considered extraordinary.

4. Declared cash dividends of $100,000 on its common stock. None of the dividends had been paid as of year-end.

show income statement and statement of retained earnings with a 40% tax rate.

Explanation / Answer

We need to reverse the expnse for Machine. Dep pa = (Cost - salvage)/life = (10000-1000)/9 = 1000 SO Dep for 2008-09 ie 2 yrs = 2000 & 2010 is 1000 Inc befor Tax $400,000 Less: Dep 2010 -$1,000 Less : Dep08-09 -$2,000 Add: MachineCost $10,000 Add: Gain on Sale $5,000 Gross Inc bef Tax $412,000 Less Tax 40% -$164,800 Net Inc $247,200 O/B Ret Earnings $1,500,000 Add: Net Inc $247,200 Less: Dividend -$100,000 Closing Ret Earnings $1,647,200

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