Question

Your boss, who was in the middle of preparing the income statement for Veney, Inc., quit and left you to finish the job. You had some doubts about the appropriate accounting treatment of the six items listed below during the fiscal year ending December 31, 2020. Assume a tax rate of 20 percent.

1. Office equipment purchased January 1, 2020 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected salvage value. Veney uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been recorded.

2. The corporation disposed of its sporting goods division during 2020. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $20,000 before taxes on the disposal of the division. All of these events occurred in 2020 and have not been recorded.

3. The company recorded advances of $10,000 to employees made December 31, 2020 as Salaries and Wages Expense.

4. Dividends of $10,000 during 2020 were recorded as an operating expense.

5. In 2020, Veney changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2020 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement.

6. On January 1, 2016, Veney bought a building that cost $85,000, had an estimated useful life of ten years, and had a salvage value of $5,000. Veney uses the
straight-line depreciation method to depreciate the building. In 2020, it was estimated that the remaining useful life was eight years and the salvage value was zero. Depreciation expense reported on the 2020 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made.

FIND PART 2a and 2b

2a. For each item, determine how any corrections should be made, if necessary, as well as determine the dollar amount of any corrections to income from continuing operations before taxes, if any. Denote any negative numbers with parentheses. A table is a good way to display your analysis. Here is a model:

2b. At January 1, 2020, Veney, Inc.'s retained earnings balance was $250,000. Assume that income from continuing operations (before taxes) and after correctly considering any of the six additional items was $1,600,000. Veney has 975,000 weighted average shares outstanding during 2020.

prepare Veney’s income statement and retained earnings statement. Denote negative numbers by using parentheses.

Answer 1

2A

	TRANSACTIONS	EFFECT ON NET INCOME	GROSS AMOUNT	AMOUNT
1	SUPPLIES EXPENSE	ADDED	$                  60,000	$                                 48,000
1	DEPRECIATION	REDUCED	$                (20,000)	$                               (16,000)
2	INCOME OF DISCONTINUED DIVISION	ADDED	$                110,000	$                                 88,000
2	LOSS ON DISPOSAL	REDUCED	$                (20,000)	$                               (16,000)
3	SALARIES AND WAGES	INCREASE	$                  10,000	$                                    8,000
4	OPERATING EXPENSES	INCREASE	$                  10,000	$                                    8,000
4	DIVIDENDS	REDUCED FROM RETAINED EARNINGS	$                  10,000	$                                 10,000
5	CHANGE IN INVENTORY METHOD	NO ADJUSTMENTS REQUIRED	$                           -	$                                           -
6	CHANGE IN ASSET'S USEFUL LIFE	NO ADJUSTMENTS REQUIRED AS IT IS CHANGE IN ACCOUNTING ESTIMATES	$                           -	$                                           -

2B

INCOME STATEMENT
PARTICULARS	AMOUNT
NET INCOME BEFORE TAXES	$      1,600,000
TAXES 20%	$      320,000.0
NET PROFIT	$ 1,280,000.0
REATINED EARNINGS STATEMENT
OPENING BALANCE	$         250,000
ADD; PROFITS FOR THE YEAR	$      1,280,000
LESS: DIVIDENDS PAID	$            10,000
CLOSING BALANCE	$      1,520,000