Question

E4.12 (LO 5) (Retained Earnings Statement) Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows. Net Income Dividends Declared 2017 $ 40,000 $ -0- 2018 125,000 50,000 2019 160,000 50,000 The following information relates to 2020. Income before income tax $240,000 Prior period adjustment: understatement of 2018 depreciation expense (before taxes) $ 25,000 Cumulative decrease in income from change in inventory methods (before taxes) $ 35,000 Dividends declared (of this amount, $25,000 will be paid on Jan. 15, 2021) $100,000 Effective tax rate 20% Instructions a. Prepare a 2020 retained earnings statement for Eddie Zambrano Corporation. b. Assume Eddie Zambrano Corporation restricted retained earnings in the amount of $70,000 on December 31, 2020. After this action, what would Zambrano report as total retained earnings in its December 31, 2020, balance sheet? E4.14 (LO 4) (Change in Accounting Principle) Tim Mattke Company began operations in 2018 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2020, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below. Year Weighted-Average FIFO 2018 $370,000 $395,000 2019 390,000 430,000 2020 410,000 450,000 Instructions a. What is Mattke's net income in 2020? Assume a 20% tax rate in all years. b. Compute the cumulative effect of the change in accounting principle from weighted average to FIFO

Answer 1

E 4-12:

(a)

   EDDIE ZAMBRANO CORPORATION
     Retained Earnings Statement
   For the Year Ended December 31, 2020

Balance, January 1, as reported .............................................. $225,000*
Correction for depreciation error (net of $5,000 tax) ............. (20,000)
Cumulative decrease in income from change in

inventory methods (net of $7,000 tax) ..........................   (28,000)
Balance, January 1, as adjusted..............................................   177,000
Add: Net income ....................................................................... 192,000**
                          369,000
Less: Dividends declared ........................................................ 100,000
Balance, December 31 ............................................................. $269,000

*($40,000 + $125,000 + $160,000) – ($50,000 + $50,000)
**[$240,000 – (20% X $240,000)]

(b)

Total retained earnings would still be reported as $269,000. A restriction does not affect total retained earnings; it merely labels part of the retained earnings as being unavailable for dividend distribution. Retained earnings would be reported as follows:

Retained earnings:
Appropriated ..................................... $ 70,000
Unappropriated.................................   199,000
Total ................................................ $ 269,000

E 4-14:

(a)

  2020
Income before income tax $450,000
Income tax (.20 X $450,000) 90,000
Net Income $360,000

(b)

Cumulative effect for years prior to 2020.

Tax Rate (20%) Net Effect Year 2018 2019 Weighted- Average $370,000 390,000 FIFO $395,000 430,000 Total Difference $25,000 40.000 $65,000 $13,000 $52,000