Question

Martinez Corporation began operations on January 1, 2017. Recently the corporation has had several unusual accounting problems related to the presentation of its income statement for financial reporting purposes. The company follows ASPE. You are the CPA for Martinez and have been asked to examine the following data: MARTINEZ CORPORATION Income Statement For the Year Ended December 31, 2020 Sales revenue $9,700,000 Cost of goods sold 6,020,000 Gross profit 3,680,000 Selling and administrative expense 1,328,000 Income before income tax 2,352,000 Income tax expense (40%) 940,800 Net income $1,411,200 This additional information was also provided: 1. The controller mentioned that the corporation has had difficulty collecting certain receivables. For this reason, the bad debt accrual was increased from 1% to 2% of sales revenue. The controller estimates that, if this rate had been used in past periods, an additional $81,300 worth of expense would have been charged. The bad debt expense for the current period was calculated using the new rate and is part of selling and administrative expense. 2. There were 300,000 common shares outstanding at the end of 2020. No additional shares were purchased or sold in 2020. 3. The following items were not included in the income statement: • Inventory in the amount of $115,000 was obsolete. • The company announced plans to dispose of a recognized segment. For 2020, the segment had a loss, net of tax, of $169,200. 4. Retained earnings as at January 1, 2020, were $3 million. Cash dividends of $800,000 were paid in 2020. 5. In January 2020, Martinez changed its method of depreciating plant assets from the straight-line method to the declining-balance method to present more relevant information. The controller has prepared a schedule that shows what the depreciation expense would have been in previous periods if the declining-balance method had been used.

Answer 1

Income Statement for Martinez Corporation:

$ 9,700,000 $ 6,020,000 $ 3,680,000 Martinez Corporation Income Statement For the Year Ended December 31, 2020 Sales Revenue Less: Cost of Goods Sold Gross Profit Selling and Administrative Expenses ($1,328,000 - $20,000) $ 1,308,000 Loss on Inventory Due to Decline in NRV $ 115,000 Less: Total Operating Expenses Income Before Income Tax and Discontinued Operations Less: Income Tax Expense (40%) Income before Discontinued Operations Discontinued Operations Less: Loss from Operation of Discontinued Segment (Net of Tax) Net Income / (loss) $ 1,423,000 $ 2,257,000 $ 902,800 $ 1,354,200 $ 169,200 $ 1,185,000

Note: Change in the method of depreciation is a change in accounting estimate and is accounted for prospectively.

The impact of errors that occurred last year will be adjusted in the opening retained earnings.

Combined Statement of Net Income and Retained Earnings:

$ 9,700,000 $ 6,020,000 $ 3,680,000 Martinez Corporation Statement of Income and Retained Earnings For the Year Ended December 31, 2020 Sales Revenue Less: Cost of Goods Sold Gross Profit/ (Loss) Selling and Administrative Expenses ($1,328,000 - $20,000) $ 1,308,000 Loss on Inventory Due to Decline in NRV $ 115,000 Less: Total Operating Expenses Income Before Income Tax and Discontinued Operations Less: Income Tax Expense (40%) Income before Discontinued Operations Less: Loss from Operation of Discontinued Segment (Net of Tax) Net Income / (loss) Retained Earnings, January 1, As Reported $3,000,000 Less: Decrease in Prior Year Income Due To Error in Recording Sales Commission (Net of Tax) [$20,000 x 60%] $ 12,000 Less: Decrease in Prior Year Income Due To Incorrect Bad Debt Estimation (Net of Tax) [$81,300 x 60%] $ 48,780 Less: Decrease in Prior Year Income Due To Change in Depreciation Accounting Method (Net of Tax) ($113,750 x 60%] $ 68,250 Retained Earnings, January 1, As Restated $ 1,423,000 $ 2,257,000 $ 902,800 $ 1,354,200 $ 169,200 $ 1,185,000 Less: Cash Dividends $ 2,870,970 $ 4,055,970 $ 800,000 $3,255,970 Retained Earnings, December 31