Question

3. The accountant preparing the income statement for Smith, Inc. had some doubts about the appropriate accounting treatment of the five items listed below during the fiscal year ending December 31, 2016. Assume a tax rate of 38 percent.

1. Office equipment purchased June 1, 2016 for $72,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated six-year service life with no expected salvage value. Smith uses the straight-line method to depreciate office equipment for financial reporting purposes.
2. The corporation disposed of its sporting goods division during 2016. This disposal meets the criteria for discontinued operations. Smith, Inc correctly calculated loss from operating this division of $150,000 before taxes and a loss of $230,000 before taxes on the disposal of the division. All of these events occurred in 2016 and have not been recorded.
3. The company recorded advances of $15,000 to employees made in December 31, 2016 as Salaries and Wages Expense.
4. Dividends of $30,000 during 2016 were recorded as an operating expense.
5. In 2016, Smith changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2016 was correctly recorded using the average cost method. The effect of this change on prior years is to increase 2014 cost of goods sold by $80,000 (before taxes) and increase 2015 cost of good sold by $30,000 (before taxes). Assume Smith, Inc. began operations on January 1, 2014.

Instructions

1. For each item, explain the impact of the corrections on the income from continuing operations, if any. (7.5 points)
2. State where the items that do not affect income from continuing operations should be shown. (4.5 points)

Answer 1

Solution:-

Number Item	Description	Increase <Decrease> to Income from Continuing Operations before taxes
1	To correct, need to put back all $72,000 of equipment into Equipment account and take out of Supplies Expense account.Also take depreciation of $7,000 for the year. Net effect is to increase income by$65,000.	$65,000
2	Discontinued Items are reported after Income from Continuing Operations	No Effect
3	Correct with Dr: Advances to Employees Cr: Salaries/Wages Expense	$15,000
4	Dividends are not reported on the Income Statement; should be on R/E Statement.	$30,000
5	There is a change in inventory method being used, Current year reported correctly on income statement. Beginning retained earnings would need to be adjusted. It will have no effect on Income from Continuing Operations.	No effect

$\bg_green Note:-$As per HOMEWORKLIB RULES if more than four sub part is posted than we liable to answer only first four sub part.

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