In the experience rate is considered a change in

  • Wayne State University
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  • JusticeFreedomGorilla9343
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in the experience rate is considered a change in estimate, which should be handled prospectively.2.A change from LIFO to FIFO is considered a change in accounting principle, which must be handled retrospectively.3.a.The inventory error in 2007 is a prior period adjustment and the 2007 and 2008 statements should be restated.b.The lawsuit settlement is correctly treated.(b)LARRY KINGSTON INC.Comparative Income StatementsFor the Years 2005 through 20082005200620072008Income before extraordinary item$143,000$125,000*$204,000$271,000Extraordinary gain40,000Net income (see below)$143,000$165,000$204,000$271,0002005200620072008Net income (unadjusted)$140,000$160,000$205,000$276,0001.Bad debt expense adjustment(12,000)2.Inventory adjustment (FIFO)15,0005,00010,000(16,000)3.Inventory overstatement(11,000)11,0004.Tax settlementNet income (adjusted)$143,000$165,000*$204,000$271,000*The income before extraordinary item in 2006 is $125,000 ($165,000 – $40,000).
PROBLEM 22-31.Retained Earnings................................................................................4,000Sales Commissions Payable.......................................................2,500Sales Commissions Expense......................................................1,5002.Cost of Goods Sold ($21,000 + $6,700)...............................................27,700Retained Earnings......................................................................21,000Inventory.....................................................................................6,700Income Overstated (Understated)200620072008Beginning inventory$ 16,000$21,000Ending inventory$(16,000)(21,000)6,700$(16,000)$ (5,000)$27,7003.Accumulated Depreciation—Equipment...........................................4,800Depreciation Expense................................................................4,800**Equipment cost$100,000Depreciation before 2008(36,000)Book value$ 64,000Depreciation to be taken ($64,000/8)$ 8,000Depreciation recorded12,800Difference$ 4,8004.Construction in Process.......................................................................55,000Deferred Tax Liability...............................................................22,000*Retained Earnings......................................................................33,000*($150,000 – $95,000) X 40%
PROBLEM 22-4(a)PLATO CORPORATIONProjected Income StatementFor the Year Ended December 31, 2007_______________________________________________________________________________Sales$29,000,000Cost of goods sold$14,000,000Depreciation expense1,600,000aOperating expenses6,400,00022,000,000Income before income taxes$ 7,000,000Unrealized holding gain2,000,000bIncome before taxes and bonus$ 9,000,000President’s bonus1,000,000Income before income taxes$ 8,000,000Income taxesCurrent$ 3,000,000Deferred1,000,000c4,000,000Net income$ 4,000,000Conditions met:1.Net income before taxes and bonus > $8,000,000.2.Payable for income taxes does not exceed $3,000,000.aDepreciation for the current year includes $600,000 for the old equipment and $2,000,000 for the robotic equipment. If the robotic equipment is changed to straight-line, its depreciation is only $1,000,000 and the total is $1,600,000.bBy urging the Board of Directors to change the classification of Securities A and D to Trading securities, income is increased by a $2,000,000 recognition of a holding gain.cThe unrealized holding gain is not currently taxable until the securities are sold.(b)Students’ answers will vary.There is nothing unethical about changing the first-year election of depreciation back to the straight-line method provided that it meets with the approval of appropriate corporate decision makers. Considering the immediate needs for cash of $1,000,000
for the president’s bonus and $3,000,000 for income taxes, there may be a need to sell some of the marketable securities. Therefore, the transfer of $3,000,000 of available-for-sale securities to trading securities may also be appropriate.It is naive to believe that corporate officers do no planning for year-end (or interim) financial statements. The slippery slope arises with manipula-tion of financial statements.

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