ch22 - SOLUTIONS TO B EXERCISES E22-1B (1015 minutes) (a)...

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Unformatted text preview: SOLUTIONS TO B EXERCISES E22-1B (1015 minutes) (a) The net income to be reported in 2007, using the retrospective approach, would be computed as follows: Income before income taxes $600,000 Income taxes (40% X $600,000) 240,000 Net income $360,000 (b) Construction in Process.................................... 180,000 Deferred Tax Liability................................. 72,000 Retained Earnings...................................... 108,000* *$180,000 X 60% = $108,000 E22-2B (1015 minutes) (a) Retained earnings.............................................. 40,000* Inventory...................................................... 40,000 *($105,000 + $70,000 + $150,000) ($120,000 + $80,000 + $165,000) (b) Net income (average-cost) 2005 $105,000 2006 70,000 2007 150,000 (c) No entry necessary on change to LIFO method. 22-1 E22-3B (1015 minutes) (a) LIFO: 2005 2006 2007 Sales $15,000 $15,000 $15,000 Cost of sales 10,000 10,500 11,000 Gross profit 5,000 4,500 4,000 Operating expenses 2,500 2,500 2,500 Net income $ 2,500 $ 2,000 $ 1,500 Average-cost: 2005 2006 2007 Sales $15,000 $15,000 $15,000 Cost of sales 9,000 9,500 10,500 Gross profit 6,000 5,500 4,500 Operating expenses 2,500 2,500 2,500 Net income $ 3,500 $ 3,000 $ 2,000 (b) Average-cost: 2006 2007 Sales $15,000 $15,000 Cost of sales 9,500 10,500 Gross profit 5,500 4,500 Operating expenses 2,500 2,500 Net income $ 3,000 $ 2,000 (c) Kyto Electronics Retained Earnings Statement For the Year Ended December 31 2006 2007 Retained earnings (beginning) $3,500 $6,500 Add: Net income 3,000 2,000 Retained earnings (ending) $6,500 $8,500 22-2 E22-3B (Continued) (d) On January 1, 2007, the Company elected to change its method of valuing its inventory to the average-cost method; in all prior years inventory was valued using the LIFO method. The Company adopted the new method of accounting for inventory to better report cost of goods sold in the year incurred. Comparative financial statements of prior years have been adjusted to apply the new method retrospectively. The following financial statement line items for fiscal years 2007 and 2006 were affected by the change in accounting principle. 2007 2006 LIFO Average Difference LIFO Average Difference Balance Sheet: Inventory $3,500 $6,000 $2,500 $3,000 $5,000 $2,000 Retained earnings 6,000 8,500 2,500 4,500 6,500 2,000 Income Statement: Cost of goods sold $11,000 $10,500 $500 $10,500 $9,500 $1,000 Net income 1,500 2,000 500 2,000 3,000 1,000 Statement of Cash Flows: (no effect) As a result of the accounting change, retained earnings as of January 1, 2006, increased from $2,500, as originally reported using the LIFO method, to $3,500 using the average-cost method....
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This note was uploaded on 05/10/2010 for the course ACC 440 BSB1658 taught by Professor Warwick during the Spring '09 term at University of Phoenix.

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ch22 - SOLUTIONS TO B EXERCISES E22-1B (1015 minutes) (a)...

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