Question

In: Accounting

income statement and retained earnings statement

Misclassifcations Roz Corporation's Multiple-Step income statement and retained earnings statement for the year ended December 31, 2019 as developed by its bookkeeper are shown here:

Revenue Statement
December 31, 2019
 
Sales (net)     $179,000
Plus: Income from operations of discontinued Division P (net of $960 income taxes)     2,240
Less: Dividends declared ($1.50 per common share)     (7,500)
Net revenues     $173,740
Less: Selling expenses     (19,000)
Gross profit     $154,740
Less Operating expenses:      
Interest expense $4,100    
Loss on sale of Division P (net of $1,200 income tax credit) 2,800    
Cost of goods sold 110,700    
Income tax expense on income from continuing operations 5,370   (122,970)
Total operating expenses     $31,770
Operating income      
Miscellaneous items:      
Dividend revenue $1,800    
General and administrative expenses (24,300)   (22,500)
Income before unusual items     $9,270
Unusual items:      
Loss on sale of land $(4,800)    
Correction of error in last year's income (net of $1,500 income taxes) 3,500   (1,300)
Net income     $7,970

 

 

 

Retained Earnings Statement
December 31, 2019
 
Beginning retained earnings $62,850
Add: Net income 7,970
Adjusted retained earnings $70,820
Less: Loss from theft (net of $2,760 income tax credit) (6,440)
Ending retained earnings $64,380

You determine that the account balances listed on the statements are correct but are incorrectly classified in certain cases. The company laces a 30% tax rate. No shares of common stock were issued or retired during 2019

Required:

1. Review both statements and indicate where each incorrectly classified item should be classified.

2 Prepare a correct multiple-step income statement for 2019

3. Determine the correct beginning balance in retained earnings and then prepare a correct 2019 retained earnings statement.

Solutions

Expert Solution

Financial statements can be defined as accounting records that tell us about the business firm's financial performance and financial position. Different types of financial statements that a company must publish are the income statement, statement of retained earnings, balance sheet, and cash flow statement. An income statement is a statement that determines the net income or net loss (financial performance) of the business during an accounting period. 

Part (1)

  • Income from discontinued operations does not get adjusted before gross profit. It is treated in a separate section.
  • The dividend declared does not come under the income statement. Payment of compensation is adjusted under the idea of retained earnings.
  • Selling expenses are a part of operating expenses. It does not get adjusted before computing gross profit.
  • Interest expenses are not a part of operating expenses.
  • Loss on sale of division is not a part of operating expenses. It will be adjusted under the result of discontinued operations.
  • The cost of goods sold should be adjusted from net revenues before computing gross profit.
  • Income tax expense is not a part of operating expenses.
  • General and administrative expenses are a part of operating expenses.
  • Loss on sale of land should come under other items rather than unusual items
  • Correction of error will be adjusted under the statement of retained earnings
  • Loss from theft will be reported under the extraordinary (unique) items in the income statement.

Part (2)

Multi-step income statement:

Accounting homework question answer, step 2, image 1

Part (3)

Beginning balance of retained earnings:

Accounting homework question answer, step 2, image 2

Retained earnings statement of 2019:

Accounting homework question answer, step 2, image 3


Answers can be found in the Explanation section.

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