Ayayai Corp. began operations in 2014. During the years 2014-2016, it reported n

Question

Ayayai Corp. began operations in 2014. During the years 2014-2016, it reported net income and declared dividends as follows. Net income $18,000 117,000 201,000 Dividends declared 2014 2015 2016 53,000 During 2017, Ayayai Corp. discovered that it had failed, in 2015, to record $36,000 in depreciation on equipment in one of its warehouses changed, on January 1,2017, from the average cost to the FIFO method of accounting for its inventory. If Ayayai Corp, had applied the FIFO method to it inventory in prior years, cumulative net income (before tax) would have been $16,000 lower than originally reported. e reported income before income tax expense of $460,000. declared and paid dividends to common shareholders of $73,000 Ayayai's effective income tax rate for all years was 40%.

Explanation / Answer

Retained Earnings Statement Retained earnings Jan1 as required 283000 (18000+117000+201000-53000) Less: Correction for depreciation error (36000-40%) 21600 Less: Cumulative decrease in Income for change in inv. 9600 (16000-40%) Retained earnings Jan1 adjusted 314200 Add: Net Income after tax (460000-40%) 276000 590200 Less: Dividend declared 73000 Retained earning Dec 31 517200

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