Chapter 20 Spiceland 6th edition

Chapter 20 Spiceland 6th edition - Exercise 20-1...

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Exercise 20-1 Requirement 1 January 1, 2011 ($ in millions) Retained earnings. ......................................................................... 30 Inventory (cumulative effect) * . ................................................. 30 2010 2009 Total * Cost of goods sold (FIFO). ....................................................... 40 38 Cost of goods sold (average). .................................................... 56 52 Difference. .............................................................................. 16 14 30 Since the cost of goods available for sale each period is the sum of the cost of goods sold and the cost of goods unsold (inventory), a $30 million difference ($16 + 14) in cost of goods sold due to using FIFO rather than Average means there also is a $30 million difference in inventory. The cumulative prior year difference in cost of goods sold is reflected as a difference in prior years’ income and therefore the balance in retained earnings. Requirement 2 C OMPARATIVE I NCOME S TATEMENTS ($ in millions) 2011 2010 Revenues $420 $390 Cost of goods sold (average) (62) (56) Operating expenses (254 ) (250 ) Net income $104 $ 84 Requirement 3 Calculations ($ in millions) :
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2009 Revenues $380 Cost of goods sold (FIFO) (38) Operating expenses (242 ) Net income $100 Dividends (20) Retained earnings, Jan. 1, 2009 0 Retained earnings, Jan. 1, 2010 $ 80
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Exercise 20-1 (concluded) Requirement 4 Calculations ($ in millions) : 2009 FIFO Average Difference Revenues $380 $380 Cost of goods sold (38) (52) Operating expenses (242 ) (242 ) Net income $100 $ 86 $14 Comparative Statements of Shareholders’ Equity (not required) ($ in millions) Common Stock Additional Paid-in Capital Retained Earnings Total Shareholders’ Equity Jan. 1, 2010* 66 Net income 84** Dividends (20) Jan. 1, 2011 130 Net income 104** Dividends (20) Jan. 1, 2012 214 * Decreased from $80 million to $66 million to reflect the effect of the change in inventory methods. **Calculations ($ in millions) : 2011 2010 Revenues $420 $390 Cost of goods sold (average) (62) (56) Operating expenses (254 ) (250 ) Net income $104 $ 84
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Exercise 20-7 Requirement 1 ($ in millions) Construction in process (additional amount due to the new method: $7 million + 3 million) ............................................ 10 Deferred tax liability ($10 million x 40%). ....................................... 4 Retained earnings (difference). ....................................................... 6 Retained earnings is increased by $6 million because the net income in years prior to 2011 would have been higher by that amount. Requirement 2 2011 2010 Income before income taxes $10.0 $8.0 Income tax expense (40%) (4 .0) (3 .2) Net Income $ 6.0 $4.8
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Exercise 20-7 (continued) Requirement 3 Besides net income, which was reported in 2010 as $3 million ($5 million less tax) and now revised to $4.8 million, other amounts that would be revised to reflect accounting by the percentage-of-completion method are:
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Chapter 20 Spiceland 6th edition - Exercise 20-1...

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