Question

Pronghorn Corporation began operations on January 1, 2014. 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 Pronghorn and have been asked to examine the following data:

PRONGHORN CORPORATION Income Statement For the Year Ended December 31, 2017
	Sales		$9,600,000
	Cost of goods sold		5,960,000
	Gross profit		3,640,000
	Selling and administrative expense		1,314,000
	Income before income tax		2,326,000
	Income tax expense (40%)		930,400
	Net income		$1,395,600

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 $84,900 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 400,000 common shares outstanding at the end of 2017. No additional shares were purchased or sold in 2017.
3.		The following items were not included in the income statement: ● Inventory in the amount of $112,000 was obsolete. ● The company announced plans to dispose of a recognized segment. For 2017, the segment had a loss, net of tax, of $158,000.
4.		Retained earnings as at January 1, 2017, were $2.8 million. Cash dividends of $800,000 were paid in 2017.
5.		In January 2017, Pronghorn changed its method of accounting for plant assets from the straight-line method to the diminishing-balance method. The controller has prepared a schedule that shows what the depreciation expense would have been in previous periods if the diminishing-balance method had been used. Depreciation Expense under Straight-Line Depreciation Expense under Diminishing-Balance Difference 2014 $71,000 $142,000 $71,000 2015 71,000 106,500 35,500 2016 71,000 79,875 8,875 $213,000 $328,375 $115,375
6.		In 2017, Pronghorn discovered that in 2016 it had failed to record $30,000 as an expense for sales commissions. The sales commissions for 2016 were included in the 2017 expenses. Prepare the income statement for Pronghorn Corporation. The effective tax rate for past years was 40%. (Hint: a change in depreciation method is considered a change in estimate, not a change in accounting policy.) Pronghorn Corporation Income Statement

Answer 1

Answer