Q) At the beginning of its 2010 calendar-year accounting period, ABC, Inc. had r
ID: 2377708 • Letter: Q
Question
Q)At the beginning of its 2010 calendar-year accounting period, ABC, Inc. had retained earning of $1,500,000. During 2010, ABC reported income from continuing operations 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 depreciation method with a $1,000 salvage value and 10 year useful life. This was discovered as the accountant was reviewing the information for the 2010 financial statements. Depreciation expense on this machine for 2010 was not included in the $400,000 above.
2. ABC had a gain on sale of a plant asset of $5,000 (pre-tax).
3. ABC had an uninsured flood loss of $50,000 (pre-tax) which was considered to be extraordinary.
4. ABC declared and paid cash dividends of $100,000 on its common stock.
A) State the correct value to be shown on the 2010 Income Statement for the sub-total,
Explanation / Answer
(510,000 - 51,000) / 5 = 91,800 should have been depreciated each year.
Since expenses were understated net income and retained earnings were overstated. Also, net assets were overstated.
The correcting entry for 2008 and 2009 would be:
Dr Retained Earnings 183,600
Cr Accumulated Depreciation, Machine 183,600
The current entry for 2010 would be:
Dr Depreciation Expense, Machine 91,800
Cr Accumulated Depreciation, Machine 91,800
Edit: You could make it three entries by putting them together.
Dr Retained Earnings 183,600
Dr Depreciation Expense, Machine 91,800
Cr Accumulated Depreciation, Machine 275,400
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