Question

New Assignment 7

USE US GAAP

A) Company A has the following income statement information for the years 2015-2017:

                                                2015 Income           2016 Income           2017 Income

                                                Statement as           Statement as              Statement

                                                   Reported                   Reported                   Totals     

Sales 10,000,000               12,500,000               17,000,000

Cost of Goods Sold           6,200,000                7,250,000                10,260,000

Gross Profit 3,800,000                5,250,000                6,740,000

Operating Expenses          2,100,000                2,835,000                3,219,000

Income from

   Operations 1,700,000                2,415,000                3,521,000

Non-Operating Items           (220,000)                   (171,000)                  (249,000)

Income from

   Continuing Operations 1,480,000                2,244,000                3,272,000

Income Tax Expense 370,000                     561,000                     818,000

Net Income                            1,110,000               1,683,000                2,454,000

During 2017, Company A changed its inventory method from weighted-average to FIFO. This change brought Hogan’s accounting into line with other companies in the industry and was approved by their auditor. Company A will continue to use the weighted-average method for tax purposes. Cost of Goods Sold under FIFO would have been $5,800,000 for 2015 and $6,900,000 for 2016.

For years prior to 2015, the change would have increased income from continuing operations by a total of $3,200,000. Company A is a calendar year company. Assume a tax rate of 25% for all years.

Required: Prepare in good form the complete 2017 Income Statement showing 2015 and 2016 Income Statements for comparative purposes. Additionally, prepare the retained earnings portion of the Statement of Stockholder’s equity for these comparative statements. (The retained earnings balance on January 1, 2015 was $3,654,000) Assume Company A declared and paid $100,000 of cash dividends each year 2015-2017.

Part B. ABC Co. decided on March 3, 2017 to dispose of their Widget Segment. The sale of the segment was completed on November 13, 2017. The disposal of this segment qualifies as a discontinued operation. Income Statement data for ABC for calendar years 2015-2017 are as follows:

                                                               2017                           2016                           2015   

Sales                                                  $3,000,000               $2,700,000               $2,500,000

Cost of goods sold 1,800,000                1,593,000                1,525,000

Operating expenses                          700,000                     680,000                     650,000

These amounts include the operating results for the Widget Segment through its disposal on November 13, 2017. Income Statement data for the Widget Segment separately for 2015-2017 are as follows:

                                                               2017                           2016                           2015   

Sales $450,000                   $600,000                   $700,000

Cost of goods sold 315,000                   408,000                   455,000

Operating expenses                     120,000                   150,000                   130,000

The book value of the assets and liabilities of Widget on November 13, 2017 was 4,800,000. The sales price was 6,210,000. ABC has a tax rate of 28% for 2015 & 2016 and a rate of 25% for 2017.

Additionally, ABC had 800,000 shares of common stock outstanding for the entire three-year period. There was no preferred stock outstanding during any of the years. ABC did have 300,000 stock options with an exercise price of $10 outstanding all three years. The average market price of ABC stock was $12 on 12/31/15, $15 on 12/31/16, and $20 on 12/31/17.

Required: Prepare, in good form, complete comparative Income Statements for ABC for the years 2015-2017 including required earnings per share information.

Answer 1

Company A
	2015	2015 (Revised)	Effect of changes in methods	2016	2016 (Revised)	Effect of changes in methods	2017
Construction revenue	10000000	13000000	3000000	12500000	14300000	1800000	17000000
Construction cost	6200000	7650000	1450000	7250000	8715000	1465000	10260000
Gross Profit	3800000	5350000	1550000	5250000	5585000	335000	6740000
Operating expense	2100000	2100000	0	2835000	2835000	0	3219000
Income from operations	1700000	3250000	1550000	2415000	2750000	335000	3521000
Non-opearting items	220000	220000	0	171000	171000	0	249000
Income from continuing operations	1480000	3030000	1550000	2244000	2579000	335000	3272000
Income tax expense	370000	757500	387500	561000	644750	83750	818000
Net income	1110000	2272500	1162500	1683000	1934250	251250	2454000

If the company made a change in charging depreciation from double declining to straight line method, this is a change in accounting principle. It requires retrospective effects. This approach requires the reporting of the cumulative effect of the impact on the carrying amounts of assets and liabilities as if the new method had been used all along with an offsetting adjustment to the opening balance of retained earnings as of the beginning balance of the first period presented.

The company discovers an error in inventory balance which resulted an understatement. Understatement in the closing inventory means opening inventory in the next year is also understated. Current year profit is also understated. And next year’s profit is overstated. At the end of two years, the adjustment in retained earnings or the profit gets adjusted automatically with similar effect in the inventory balance.

Changes in reporting entities also require retrospective application. Prior period financial statements are reflected to show the financial information for the new reporting entity as if the entity had existed in that form all along. Cumulative earnings differences are reported through beginning retained earnings as of the beginnings of the first period presented.