Question

signment CALCULATOR MESSAGE HY INSTRUCTOR ES FULL SCREEN PRINTER VERSION 4 BACK Exercise 22-9 NEXT Presented below are the comparative income and retained earnings statements for Nash Inc. for the years 2017 and 2018. 2018 2017 Sales $334,000 $264,000 Cost of sales 217.000 144,000 Gross profit 117,000 120,000 Expenses 95,200 50,700 Net income $21,800 $69,300 Retained earnings (Jan. 1) $121.700 $76,300 Net income 21,800 69,300 Dividends (31,400) (23,900) Retained earnings (Dec. 31) $112,100 $121,700 The following additional information is provided: In 2018, Nash Inc. decided to switch its depreciation method from sum-of-the-years' digits to the straight-line method. The assets were purchased at the beginning of 2017 for $106,500 with an estimated useful life of 4 years and no salvage value. (The 2018 income statement contains depreciation expense of $31,950 on the assets purchased at the beginning of 2017.) 1. In 2018, the company discovered that the ending inventory for 2017 was overstated by $24,200: ending inventory 2. for 2018 is correctly stated. Prepare the revised retained earnings statement for 2017 and 2018, assuming comparative statements. (Ignore income taxes.) NASHIC

Answer 1

Revised Retained earning statement for the year 2018 & 2017

Particulars	2018	2017
Sales	3,34,000	2,64,000
Less: Cost of sales	1,92,800	1,68,200
Gross Profit	1,41,200	95,800
Less: Expenses	73,900	50,700
Net Income	67,300	45,100
Retained Earnings (Jan.1)	97,500	76,300
Net Income	67,300	45,100
Dividends	31,400	23,900
Retained Earnings (Dec.31)	1,33,400	97,500

WORKING NOTE 1 : DEPRECIATION

Statement of depreciation as per Sum of year digit method

Years	Depreciation Base	Remaining life of machine	Depreciation Fraction	Depreciation Expense	Accumulated depreciation
1	1,06,500	4	4/10*	42,600	42,600
2	1,06,500	3	3/10	31,950	74,550
3	1,06,500	2	2/10	21,300	95.850
4	1,06,500	1	1/10	10,650	1,06,500
	Total	10		1,06,500

* 4+3+2+1 = 10

Statement of depreciation as per Straight line method

Year	Depreciation Base	Depreciation fraction	Depreciation expense	Accumulated depreciation
1	1,06,500	1/4	26,625	26,625
2	1,06,500	1/4	26,625	53,250
3	1,06,500	1/4	26,625	79,875
4	1,06,500	1/4	26,625	1,06,500
	Total		1,06,500

As Nash Inc. decided to switch off the depreciation method from sum of year digit method to straight line method of depreciation so the effect of same was taken in above revised statement explained as below:

Total Depreciation till 2018 as per the sum of year digit method = $74,550

Total Depreciation as per Straight line method of depreciation = $53,250

Depreciation charged in Excess = $21,300

So, the amount of $21,300 is to be reduced from the amount of expenses in the year of change of method of depreciation i.e. 2018 as the same was shown in excess of what would have been shown if SLM method was followed from the very beginning i.e from the date when the asset was acquired.

Expenses as per statement = 95,200

Less: Depreciation adjustment = 21,300

Total expenditure to be shown in statement = $73,900

WORKING NOTE : CLOSING INVENTORY

Cost of sales = Opening inventory + purchases - closing inventory

As per the above formulae if our closing inventory is overstated then our cost of sales will come low or will get reduced by such overstated value so as per the details given in the question the closing inventory was overstated by $24,200 that means cost of sales was understated by the same amount i.e, $ 24,200 so we have to add that amount in cost of sales of year 2017 after that cost of sales for year 2017 comes to $1,68,200 ($1,44,000 + $24,200).

After making the above entry in year 2017 our net income will come to $45,100 which will become the opening retained earning of year 2018.

As the closing stock of 2017 becomes opening stock of 2018 so in the year 2018 the cost of sales shows the increased amount by $24,200 so we have to reduce the such amount and after such reduction cost of sales comes to $1,92,800 ($2,17,000 - $24,200).