Question

ABC Company is preparing its 2018 financial statements.  Income from Continuing Operations (ICO) for 2018 was determined to be $1,800,000, but upon further review, ABC's accountant is not certain this number is accurate. ABC has a corporate tax rate of 30%. Additionally, the company reports one year of financial data on the face of the financial statements. Use the following information to determine the adjustments, if any, to correctly report Income From Continuing Operations.

1. During 2018, ABC experienced a labor strike which closed down the operations of one of its plants for an entire month. The pretax loss of $875,000 was excluded when determining Income from Continuing Operations because the bookkeeper was uncertain if this event qualified for discontinued operations, although the plant was re-opened after the strike was settled and did not represent a strategic shift in the on-going operations for ABC. Additionally, this plant did not qualify as a component of ABC.

A. Determine the adjustment (if any) to correct Income from Continuing Operations (ICO) for the labor strike. $_______

*If you need to increase ICO, enter your answer as a positive number; if you need to decrease ICO, enter your answer as a negative number using () parenthesis. If you determine that ABC treated the labor strike correctly and that ICO does not need to be adjusted, enter NE for No Effect. You do not need to record your answer using $ signs or commas.

Continuing with the information presented in #9 above, ABC has ICO of $1,800,000 and a corporate tax rate of 30%. Determine if ICO should be adjusted based on the following information:

On October 1, 2016, ABC received $360,000 cash in advance for the sale of merchandise to a customer. The contract specified that ABC would deliver their product in equal monthly quantities over the next five years. When ABC recorded the sale, the bookkeeper credited Sales Revenue. No adjusting or correcting entries were made although ABC has fulfilled their obligation to delivering the goods as stipulated in the contract.  ABC did not realize the error until after the 2018 Income from Continuing Operations was calculated at $1,800,000.

B. Determine the adjustment for Sales Revenue affecting ICO for 2018:   $______

C. Determine the effect of this error on Retained Earnings (if any): $_______

*If you need to increase ICO, enter your answer as a positive number; if you need to decrease ICO, enter your answer as a negative number using () parenthesis. If you determine that ABC treated the transaction correctly and that ICO does not need to be adjusted, enter NE for No Effect. You do not need to record your answer using $ signs or commas.

Continuing with the information presented in #9 above, ABC has ICO of $1,800,000 and a corporate tax rate of 30%. Determine if ICO should be adjusted based on the following information:

ABC purchased equipment for $120,000 on January 1, 2013 with an estimated 10 year useful life and $10,000 salvage value. ABC uses the straight-line method to depreciate this class of asset. At the end of 2018, ABC determined it was appropriate to change the depreciation method of this asset to the Double-Declining-Balance method. The bookkeeper was unaware of this change and already calculated 2018 ICO using the straight-line method.

D: Adjustment (if any) for Depreciation Expense (2018): $______

*If you need to increase ICO, enter your answer as a positive number; if you need to decrease ICO, enter your answer as a negative number using () parenthesis. If you determine that ABC treated the transaction correctly and that ICO does not need to be adjusted, enter NE for No Effect. You do not need to record your answer using $ signs or commas.

Continuing with the information presented in #9 above, ABC has ICO of $1,800,000 and a corporate tax rate of 30%. Determine if ICO should be adjusted based on the following information:

Over the past four years ABC has estimated bad debts based on 4% of accounts receivable. In 2018, after reviewing their major client's credit worthiness, they decided to change this estimate to 3%. As of December 31st, ABC reported their accounts receivable at $860,000, and the Balance Before Adjustment in the Allowance for Doubtful Accounts was $10,100 (cr).

The $1,800,000 of ICO had been calculated prior to recording Bad Debt Expense for 2018.

E: Adjustment for Bad Debt Expense for 2018: $______

*If you need to increase ICO, enter your answer as a positive number; if you need to decrease ICO, enter your answer as a negative number using () parenthesis. If you determine that ABC treated the transaction correctly and that ICO does not need to be adjusted, enter NE for No Effect. You do not need to record your answer using $ signs or commas.

In 2018, ABC had a foreign currency transaction gain on certain inventory purchases with overseas suppliers in the amount of $147,000 (pre-tax) and an unrealized loss (pre-tax) on pension adjustments of $212,000. Neither of these events were included in determining the $1,800,000 ICO.

F. Adjustment to 2018 ICO for the Foreign Currency Transaction: $______

G. Adjustment to 2018 ICO for the Pension Adjustment: $_______

  *If you need to increase ICO, enter your answer as a positive number; if you need to decrease ICO, enter your answer as a negative number using () parenthesis. If you determine that ABC treated the transaction correctly and that ICO does not need to be adjusted, enter NE for No Effect. You do not need to record your answer using $ signs or commas.

Using the adjustments you made to Income From Continuing Operations in questions 9-13 above, determine the CORRECTED ICO for 2018:

H: Corrected ICO for 2018 $_______

Answer 1

Correct ICO For Year 2018

       Income from Continuing operations :   1800000

1)   Adjustment for Labour Strike         :          (875000) ( Labour Strike loss is normal Continuing Operations loss)

2) Adjustment for Sales revenue      :          N E     ( Adjustment to be made from Retained earnings Because

                                                                      Year 2016 has been closed and transferred to Retained Earnings )

4) Adjustment for Depreciation Expense :    (22543) ( Effects of Change in Accounting Policy )

                  Adjusted ICO                                 $ 902457

Effect of Error no 2) on retained earnings :

Retained Earnings are overstated by error no. 2 , Therefore needs to be reduced

Year             Correct Revenue               Recorded revenue            Overstated

2016           360000/60 =6000/month

                      6000*3=18000                        360000                             342000

2017            6000*12 =72000                         ----                                  270000

2018            6000*12 =72000                       ------                                 198000

Therefore Retained earnings are to be reduced by 198000

                                   Effect of change in Depreciation Policy

Years	SLM(120000-10000/10)	DDB@ 20%(SLM Rate*2)
2013	11000	24000
2014	11000	19200
2015	11000	15360
2016	11000	12288
2017	11000	9831
2018	11000	7864
Total	66000	88543

So net effect is 88543-66000 =22543 Extra Expense