Reference no: EM131821303

Accounting for changes and error corrections.

Dyke Company's net incomes for the past three years are presented below:

2016	2015	2014
$480,000	$450,000	$360,000

During the 2016 year-end audit, the following items come to your attention:

1. Dyke bought equipment on January 1, 2013 for $392,000 with a $32,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method)

2. During 2016, Dyke changed from the straight-line method of depreciating its cement plant to the double-declining balance method. The following computations present depreciation on both bases:

	2016	2015	2014
Straight-line	36,000	36,000	36,000
Double-declining	46,080	57,600	72,000

The net income for 2016 was computed using the double-declining balance method, on the January 1, 2016 book value, over the useful life remaining at that time. The depreciation recorded in 2016 was $72,000.

Dyke, in reviewing its provision for uncollectibles during 2014, has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2015 and 2016 when the expense had been $18,000 and $12,000, respectively. The company recorded bad debt expense under the new rate for 2016. The company would have recorded $6,000 less of bad debt expense on December 31, 2016 under the old rate.

Instructions

(a) Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year.

(b) Compute the net income to be reported each year 2014 through 2016.

(c) Assume that the beginning retained earnings balance (unadjusted) for 2014 was $1,260,000. At what adjusted amount should this beginning retained earnings balance for 2014 be stated, assuming that comparative financial statements were prepared?

(d) Assume that the beginning retained earnings balance (unadjusted) for 2016 is $1,800,000 and that non-comparative financial statements are prepared. At what adjusted amount should this beginning retained earnings balance be stated?