Question

*P21.14 Jacobsen Corporation is negotiating a loan for expansion purposes. Jacobsen's books and records have never been audited and the bank has requested that an audit be performed and that IFRS be followed. Jacobsen has prepared the following comparative financial statements for the years ended December 31, 2020 and 2019.

Jacobsen Corporation Statement of Financial Position as at December 31, 2020 and 2019
		2020		2019
Assets
Current assets
Cash		$163,000		$ 82,000
Accounts receivable		392,000		296,000
Allowance for doubtful accounts		(37,000)		(18,000)
Fair value—net income investments		78,000		78,000
Inventory		207,000		202,000
Total current assets		803,000		640,000
Plant assets
Property, plant, and equipment		167,000		169,500
Accumulated depreciation		(121,600)		(106,400)
Plant assets (net)		45,400		63,100
Total assets		$848,400		$703,100
Liabilities and Shareholders' Equity
Liabilities
Accounts payable		$121,400		$196,100
Shareholders' equity
Common shares, no par value, 50,000 authorized, 20,000 issued and outstanding		260,000		260,000
Retained earnings		467,000		247,000
Total shareholders' equity		727,000		507,000
Total liabilities and shareholders' equity		$848,400		$703,100

Jacobsen Corporation Income Statement for the Years Ended December 31, 2020 and 2019
		2020		2019
Sales		$1,000,000		$900,000
Cost of sales		430,000		395,000
Gross profit		570,000		505,000
Operating expenses		210,000		205,000
Administrative expenses		140,000		105,000
		350,000		310,000
Net income		$  220,000		$195,000

During the audit, the following additional facts were determined:

1. An analysis of collections and losses on accounts receivable during the past two years indicates a drop in anticipated bad debt losses. Management has decided that the loss experience rate on sales should be reduced from the recorded 2% to 1.5%, beginning with the year ended December 31, 2020.

2. An analysis of the fair value—net income investments revealed that the total fair value for these investments as at the end of each year was as follows:

   Dec. 31, 2019		$78,000
   Dec. 31, 2020		$65,000

3. Inventory at December 31, 2019, was overstated by $8,900 and inventory at December 31, 2020, was overstated by $13,600.

4. On January 2, 2019, equipment costing $30,000 (estimated useful life of 10 years and residual value of $5,000) was incorrectly charged to operating expenses. Jacobsen records depreciation on the straight-line basis. In 2020, fully depreciated equipment (with no residual value) that originally cost $17,500 was sold as scrap for $2,800. Jacobsen credited the $2,800 in proceeds to the Equipment account.

5. An analysis of 2019 operating expenses revealed that Jacobsen charged to expense a four-year insurance premium of $4,700 on January 1, 2019.

6. The analysis also revealed that operating expenses were incorrectly classified as part of administrative expenses in the amount of $15,000 in 2019 and $35,000 in 2020.

Instructions

a. Prepare the journal entries to correct the books at December 31, 2020. The books for 2020 have not been closed. Ignore income tax effects.

b. Beginning with reported net income, prepare a schedule showing the calculation of corrected net income for the years ended December 31, 2020 and 2019, assuming that any adjustments are to be reported on comparative statements for the two years. Ignore income tax effects. (Do not prepare financial statements.)

c. Prepare a schedule showing the calculation of corrected retained earnings at January 1, 2020.