I. INTRODUCCIÓN
1.3. Teorías Relacionadas al tema
return for a prior year.
TIP: In this case, the error correction caused a decrease in the reported amount of Retained
Earnings (because it was a debit). Sometimes a correction of an error results in a credit to Retained Earnings.
TIP: In this case, the change in accounting principle caused an increase in the reported
amount of Retained Earnings (because it was a credit). Sometimes the cumulative effect of a change in accounting principle is a charge (debit) to Retained Earnings.
(b)
Chelsea Clinton Corp.
RETAINED EARNINGS STATEMENT For the Year Ended December 31, 2014
Retained earnings, Jan. 1, 2014, as previously reported $ 1,800,000 Less: Correction of an error in depreciation in prior period
(net of $10,500 income tax effect) 24,500 Add: Effect on prior periods of a change in accounting principle
(net of $22,500 income tax effect) 52,500 Adjusted balance of retained earnings at Jan. 1, 2014 1,828,000
Add: Net income 91,000
1,919,000
Less: Dividends declared 42,000
4-20 Problem Solving Survival Guide for Intermediate Accounting, 15th Edition
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EXERCISE 4-5
Purpose:
(L.O. 4) This exercise will test your knowledge of the elements and arrangementof the major sections of the income statement.
Instructions
The following list represents captions that would appear on an income statement (single-step format) for a company reporting an extraordinary gain, an extraordinary loss, and losses from discontinued operations, as well as the results of continuing operations for the period. You are to “unscramble” the list and prepare a skeleton income statement using the captions given. (If you do not wish to write out each caption above, you may still test your knowledge by listing the appropriate letters in the correct order.)
(a) Income before extraordinary item (b) Revenues
(c) Extraordinary loss (net of tax) (d) Income taxes
(e) Discontinued operations: (f) Extraordinary gain (net of tax) (g) Expenses
(h) Loss from disposal of discontinued component of business (net of tax) (i) Net income
(j) Income from continuing operations before income taxes
(k) Loss from operations of discontinued component of business (net of tax) (l) Income from continuing operations
Solution to Exercise 4-5
Company Name INCOME STATEMENT
For the Year Ended December 31, 20XX
(b) Revenues (g) Expenses
(j) Income from continuing operations before income taxes (d) Income taxes
(l) Income from continuing operations (e) Discontinued operations:
(k) Loss from operations of discontinued component of business (net of tax) (h) Loss from disposal of discontinued component of business (net of tax) (a) Income before extraordinary item
(c) Extraordinary loss (net of tax) (f) Extraordinary gain (net of tax) (i) Net income
Income Statement and Related Information 4-21 ____________________________________________________________________________
TIP: The current operating performance concept would call for all irregular gains and losses and
corrections of revenues and expenses of prior periods to be taken directly into the Retained Earnings account, rather than reported in the current period’s income statement. Whereas, the
all-inclusive concept would call for these items to all be reported in the current period’s income
statement. Generally accepted accounting principles in the United States currently require a
modified all-inclusive concept. This means the corrections of revenues and expenses of prior
periods go directly to Retained Earnings (along with the effect on prior periods of a change in accounting principle) and, with minor exceptions, all other items (such as unusual gains and losses, discontinued operations and extraordinary items) are reported on the income statement. Irregular items are highlighted so that a reader of financial statements can better determine the long-run earning power of the enterprise.
EXERCISE 4-6
Purpose:
(L.O. 3, 4, 5, 6, 7) This exercise will enable you to practice identifying the properclassification for items on an income statement. It will also give you an example of how the tax effects of various items are reflected in the income statement. Margaret Moylan had the following selected transactions and events occur during 2014. The corporation is subject to a 30% tax rate on all items. All amounts are material. The corporation is engaged in the sale of energy products. The company does not report comparative financial statements.
1. The corporation experienced an uninsured flood loss in the amount of $60,000 during the year. A flood is unusual and infrequent in the region where the corporation resides. 2. At the beginning of 2012, the corporation purchased an office machine for $108,000
(salvage value of $18,000) that has a useful life of six years. The bookkeeper used straight-line depreciation for 2012 and 2013, but failed to deduct the salvage value in computing the depreciable base. The same depreciation calculations were used for tax purposes.
3. Sale of securities held as a part of Moylan’s portfolio resulted in a loss of $62,200 (pretax).
4. When its president died, the corporation realized $100,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $34,000 (the gain is nontaxable).
5. The corporation disposed of a component of business at a loss of $140,000 before taxes.
6. The corporation decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years would be to increase 2012 income by $64,000 and decrease 2013 income by $20,000 before taxes. The FIFO method has been used for 2014.
4-22 Problem Solving Survival Guide for Intermediate Accounting, 15th Edition
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Instructions:
Describe how each of the items above will be reported in a multiple-step income statement for 2014. Indicate the amount that will be reported and the section of the income statement in which the amount will appear.
Solution to Exercise 4-6
1. A loss of $42,000 ($60,000 minus 30% of $60,000) will be reported in the extraordinary items section of the income statement.
2. Depreciation expense of $15,000 [($108,000 - $18,000) ÷ 6 years] will appear in the administrative expense (an operating expense) section of the 2014 income statement. The correction of an error in computing prior periods’ depreciation (a prior period adjustment) will not appear on the income statement. Rather, a credit of $4,200 will appear on the retained earnings statement for 2014 as an adjustment to the beginning balance of retained earnings (assuming single-period rather than comparative financial statements are presented). The prior period adjustment is reported net of tax. Computations:
$108,000 ÷ 6 = $18,000 depreciation taken in 2012. $108,000 ÷ 6 = $18,000 depreciation taken in 2013.
($108,000 - $18,000) ÷ 6 = $15,000 correct annual depreciation. $15,000 x 2 = $30,000 correct depreciation for 2012 & 2013.
($18,000 + $18,000) - $30,000 = $6,000 overstated expense in prior years. $6,000 - 30%($6,000) = $4,200 addition to retained earnings.
3. A loss of $62,200 will be reported in the other expenses and losses section of the income statement. It is not reported net of tax.
4. A gain of $66,000 ($100,000 - $34,000) will appear in the other revenues and gains section of the income statement. It is not reported net of tax (in this case, it had no tax effect anyway). A good caption for this item is “Gain from proceeds of life insurance policy.”
5. A loss of $98,000 ($140,000 minus 30% of $140,000) will appear as a loss in the discontinued operations section of the income statement.
6. A cumulative effect on prior periods of a change in accounting principle from average cost to FIFO will appear as a $30,800 credit adjustment to retained earnings balance at the beginning of 2014 on the retained earnings statement. The 2014 income statement will report amounts based on application of the new (FIFO) method. Computations:
$64,000 credit (increase in prior period income) 20,000 debit (decrease in prior period income) 44,000 credit (net catch-up adjustment needed) 70% net of tax rate
Income Statement and Related Information 4-23 ____________________________________________________________________________