Sol_E1SP06 - ACCOUNTANCY 321 Spring, 2006 EXAM I - SOLUTION...

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ACCOUNTANCY 321 Spring, 2006 EXAM I - SOLUTION I.A. INCOME STATEMENT Sales $795,000 Cost of Goods Sold $290,000 Adjustment for change in estimate - 6,000 284,000 Gross Profit $511,000 Advertising Expense $ 16,000 Sales Salaries 35,000 Depreciation on Office Building 85,000 136,000 Income from Operations $375,000 Unusual Gain 45,000 Income from Continuing Operations Before Income Tax $420,000 Income Tax 168,000 Income from Continuing Operations $252,000 Discontinued Operations Loss from Operations of Awning Division, less applicable income tax of $58,000 (87,000) Gain on disposal of Awning Division, less applicable income tax of $140,000 210,000 123,000 Income before Extraordinary Item $375,000 Extraordinary Loss, less applicable income tax of $28,800 (43,200) Net Income $331,800
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RETAINED EARNINGS STATEMENT Retained Earnings, December 31, 2004 $440,000 Correction of Error – failure to record depreciation expense in 2003, less applicable tax of $12,000 (18,000) Change in Accounting Principle – cumulative effect of change from LIFO to FIFO, less applicable income tax of $16,000 24,000 Adjusted Retained Earnings, December 31, 2004 $446,000 Net Income for 2005 331,800 Less: Dividends declared (92,000) Retained Earnings, December 31, 2005 $685,800 The following are Balance Sheet accounts and should not be included on the Income Statement or Retained Earnings Statement: Accounts payable Accounts Receivable Allowance for Doubtful Accounts Cash Goodwill Leased Equipment Obligation under Capital Lease Warranty Liability
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B. Tax on continuing operations $168,000 Less: tax credit on Discontinued Operations (58,000) Plus: tax on disposal of Discontinued Operations 140,000 Less: tax credit on Extraordinary Loss (28,800) Less: tax credit on Correction of Error (12,000) Plus: tax on Change in Accounting Principle 16,000 Total Income Tax Expense for 2005 $225,200 C. Interperiod income tax allocations are income tax expenses for Financial Accounting purposes which are allocated between multiple years. They occur because of timing differences between when income and expense items are recognized for Financial Accounting purposes and for Tax purposes.
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II. A. The conceptual framework is a coherent system of interrelated objectives and fundamentals which can lead to consistent standards and that prescribe the nature, function, and limits of financial accounting and reporting. The fundamentals are the
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Sol_E1SP06 - ACCOUNTANCY 321 Spring, 2006 EXAM I - SOLUTION...

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