Question

Question 2: At the beginning of its 2020 calendar-year accounting period, Clay, Inc. had retained earnings of $6,500,000. During 2020, Clay reported income from continuing operations before taxes of $1,100,000. The following additional transactions occurred in 2020 but were not included in the $1,100,000. Assume all of the following were material. 1. Clay had a restructuring charge of $16,000 (pre-tax). 2. Clay had an uninsured flood loss of $20,000 (pre-tax) which was considered to be both unusual and infrequent. 3. During 2020, Clay decided to sell an unprofitable segment of its business. The sale of this segment qualifies as a discontinued operation for financial reporting purposes. However, at the end of 2020, the company had yet to sell the segment. On December 31, 2020 the segment assets had a fair value minus anticipated costs to sell of $3,700,000 and a book value of $4,200,000. For the year, the segment reported an operating loss of $500,000. 4. Clay declared and paid cash dividends of $70,000 on its common stock. 5. At the beginning of 2017, the company purchased a machine for $50,000 that they expensed during 2017. The company would normally have used the straight-line depreciation method with a $500 salvage value and 9 year useful life. This was discovered as the accountant was reviewing the information for the 2020 financial statements. Depreciation expense on this machine for 2020 was not included in the $1,100,000 above. a. Prepare an income statement for the year 2020, beginning with Income from Continuing Operations before Taxes. Assume the tax rate was 40%. b. What is the ending Retained Earnings balance for Clay, Inc. as of December 31, 2020? Prepare a Statement of Retained Earnings.

Answer 1

Answer A:

Income Statement for the Year 2020	Amount in $
Income from Continuing Operations before tax	1100000
Expenses:
Less: Restructing Charge	16000
Less: Loss due to flood	20000
Less: Depreciation Expense for the machine from Year 17 to Year 20	22000
Less: Loss on account of sale of asset	500000
Profit Before Tax	542000
Tax @40%	216800
Profit After Tax	325200

Answer B:

Retained Earnings	Amount in $
Opening Balance as on Year 2020	6500000
Add: Profit After Tax during the year 2020	325200
Less: Cash Dividends paid out	70000
Closing balance	6755200