Pryor Company\'s net income for the past three years are presented below: After

Question

Pryor Company's net income for the past three years are presented below:

After the 2013 reported year-end, the following items come to your attention:

- Pryor bought a truck January 1, 2010 for $98,000 with an $8,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line depreciation should have been used.)

- Pryor purchased a cement plant on January 1, 2011 for $180,000—estimated useful life, 10 years, no salvage value and straight-line depreciation was used. At the beginning of 2013, Pryor changed from straight-line to the double-declining balance depreciation method. Original useful live and salvage estimates remain unchanged.

- The net income for 2013 was computed on the double-declining balance method for the cement plant and did not reflect any depreciation related to the truck expensed in 2010.

Required:

1. Prepare the entries necessary to correct the books for the truck transaction assuming straight-line depreciation should be used and the books have been closed for 2013.

2. Calculate the DDB depreciation recorded in 2013 for the cement plant.

3. Present revised income statement data for the years 2011 to 2013 in accordance with generally accepted accounting principles starting with income amounts reported above. Ignore all income tax effects and earnings per share amounts.

4. Assume that the beginning retained earnings balances (unadjusted) for 2011 was $630,000, for 2012 was $810,000 and for 2013 was $1,035,000 and no dividends were paid during those periods, prepare the revised retained earnings statements for the 3 years.

Explanation / Answer

Answer 1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. Dec 31, Truck                                                     Dr.          98,000 2013    To Retained Earnings          98,000 Dec 31, Retained Earnings                          Dr.          15,000 2013    To Accumulated Dep. - Truck          15,000 Dep on Truck - 2011 - (98000 - 8000) / 6 Years = $15000 Dec 31, Retained Earnings                          Dr.          15,000 2013    To Accumulated Dep. - Truck          15,000 Dep on Truck - 2012 - (98000 - 8000) / 6 Years = $15000 Dec 31, Depreciation Exp.                          Dr.          15,000 2013    To Accumulated Dep. - Truck          15,000 Dep on Truck - 2013 - (98000 - 8000) / 6 Years = $15000 Answer 2. 01/01/2011 Purchase Cost of Cement Plant 180000 Less: Dep. For 2011 - 180,000/10 Years 18000 31/12/2011 Book Value of Cement Plant 162000 Less: Dep. For 2012 - 180,000/10 Years 18000 31/12/2012 Book Value of Cement Plant 144000 Balance Life of Cement Plant = 8 Years Straight Line Rate of dep. = 12.50% Rate of Dep. Under DDB = 2 X 12.50% = 25% Dep. Under DDB Method for 2013 = $144,000 X 25% = $36,000 Answer 3. Revised Income Statement 2011 2012 2013 Net Income              240,000          225,000          180,000 Add: Value Of Truck                98,000                     -                       -   Less: Dep. On Truck              (15,000)          (15,000)          (15,000) Revised Net Income              323,000          210,000          165,000 Answer 4. Revised Retained Earning Statements Beginning Balance - Jan -1, 2011              630,000 Add: Net Profit -2011              323,000 End Balance - Dec 31, 2011              953,000 Add: Net Profit -2012              210,000 End Balance - Dec 31, 2012          1,163,000 Add: Net Profit - 2013              165,000 End Balance - Dec 31, 2013          1,328,000

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