Question

Hannam Co. decided to change from the declining balance method of depreciation to the straight line method effective 1 January 20X7. The following information was provided:

 

The company has a 31 December year end. The tax rate is 20%. No dividends were declared until 20X7; $20,000 of dividends were declared and paid in December 20X7. Income for 20X7, calculated using the new accounting policy, was $105,000.

 

Required:

Assuming that the change in policy was implemented retrospectively, present the retained earnings reconciliation that would appear in Hannam’s 20X7 statement of changes in equity.

Answer 1

Hannam Company

Statement of Changes in Shareholder’s Equity x

Retained Earnings Section

Year Ended 31 December 20x7

 

Retained earnings, 1 January 20X7, as previously reported¹............................ $80,000

Change in accounting policy, net of tax of $7,900.............................................    31,600

Retained earnings, 1 January as restated.......................................................... 111,600

Plus: Net income.............................................................................................     105,000

Less: Dividends declared..............................................................................       (20,000)

Retained earnings, 31 December 20x7............................................................ $196,600

 

¹      ($30,000) + $35,000 + $22,500 + $52,500 = $80,000

 

²      Change in policy (credit):  $39,500   ($5,000 + $15,000 + $12,500 + $7,000)

       Tax effect                                 7,900................................ ($39,500 × 20%)

       Net amount                         $31,600