Adjusting the beginning balance of retained earnings

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adjusting the beginning balance of retained earnings is inappropriate as the increased charge in this case affects current and future income statements.4.Earnings per share should be reported on the face of the income statement and not in the notes to the financial statements. Because such importance is ascribed to this statistic, the profession believes it necessary to highlight the earnings per share figure. In this case the company should report both income before extraordinary item and net income on a per share basis.
PROBLEM 4-6(a)ACADIAN CORP.Retained Earnings StatementFor the Year Ended December 31, 2010Retained earnings, January 1, as reported.............................................................$257,600Correction of error from prior period (net of tax)......................................................25,400Adjustment for change in accounting principle (net of tax)......................................(23,200)Retained earnings, January 1, as adjusted.............................................................259,800Add: Net income................................................................................................52,300*Less: Cash dividends declared...............................................................................32,000Retained earnings, December 31............................................................................$280,100*$52,300 = ($84,500 + $41,200 + $21,600 – $35,000 – $60,000)(b)1.Gain on sale of investments—body of income statement. This gain should not be shown net of tax on the income statement.2.Refund on litigation with government—body of income statement, possibly unusual item. This refund should not be shown net of tax on the income statement.3.Loss on discontinued operations—body of the income statement, following the caption, “Income from continuing operations.”4.Write-off of goodwill—body of income statement, possibly un-usual item. The write-off should not be shown net of tax on the income statement.PROBLEM 4-7
WADE CORP.Income Statement (Partial)For the Year Ended December 31, 2010Income from continuing operationsbefore income tax......................................................$1,200,000*Income tax.........................................................456,000**Income from continuing operations...............................744,000Discontinued operationsLoss from operations of discontinued subsidiary.................................$ 90,000Less: Applicable income tax reduction...................................34,200$ 55,800Loss from disposal of subsidiary..........................100,000Less: Applicable income taxreduction....................................38,00062,000117,800Income before extraordinary item.................................626,200Extraordinary item:Gain on condemnation......................................125,000Less: Applicable income tax.............................50,00075,000Net income....................................................................$ 701,200Per share of common stock:Income from continuing operations.................................................................$4.96Discontinued operations, net of tax.................................................................(0.79)Income before extraordinary item...................................................................4.17Extraordinary item, net of tax..........................................................................0.50Net income ($701,200 ÷ 150,000)..................................................................$4.67*Computation of income from continuing operations before income tax:As previously stated$1,210,000
Loss on sale of equipment [$40,000 – ($80,000 – $30,000)](10,000)Restated$1,200,000**Computation of income tax expense:$1,200,000 X .38 = $456,000
Note: The error related to the intangible asset was correctly charged to retained earnings.CA 4-1The deficiencies of O’Malley Corporation’s income statement are as follows:1.The heading is inappropriate. The heading should include the name of the company and the period of time for which the income statement is presented.2.Gain on recovery of insurance proceeds should be classified as an extraordinary item in a separate section of the income statement.

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