Reference no: EM131226670

Problem 1 -

On May 1, 2014, ABC Corporation purchased equipment for $60,000 by issuing a one-year, 4% note payable, with interest to be paid at maturity on May 1, 2015. The company routinely depreciates its equipment over a 5 year life with no salvage value using the straight-line method.

The bookkeeper recorded the equipment purchase with a debit to a nominal account (Miscellaneous expense) and a credit to Note Payable. No adjusting entries were recorded in 2014 or 2015. All interest expense was recorded at maturity of the note.

Determine the effect of the error(s) on the company's 2014 and 2015 financial statements. Ignore the income tax effect.

Problem 2 -

The accountant for ABC Corp. has calculated net income from continuing operations of $400,000 for the fiscal year ending 12/31/15. ABC has a tax rate for all years of 30% and presents only one year on the face of its financial statements. The accountant is now reviewing the following transactions in an effort to answer the questions required on the next pages:

a) On March 31, 2015, ABC decided to sell off one of its unsuccessful locations as a component and recorded the following: The sale of the component was completed on November 1, 2015 for $2,000,000, at which time the book value of the component's assets were recorded at $1,700,000. From January 1-March 31, the component had pre-tax income of $10,000 and from March 31-November 1 had pre-tax income of $30,000. The gains or losses described above were not included in 2015 net income from continuing operations.

b) On January 1, 2013 ABC purchased a machine for $60,000. It had a salvage value of $6,000 and a useful life of 6 years. ABC used straight-line depreciation for 2013, 2014 and in the calculation of the $400,000 above for 2015. Upon review, the accountant decides to change the depreciation method to the double declining balance method. NOTE: Depreciation calculation adjustment must use Out-of-the Ordinary Accumulated Depreciation adjustment. I accepted either way for the exam but for corrections you must use the recalculation method.

c) ABC discovers that land purchased for $30,000 (pre-tax) in 2013 was expensed at that time.

d) The Retained Earnings balance at the beginning of 2015 was $2,000,000. Common stock dividends of $80,000 were declared on December 20, 2015 to be paid on January 10, 2016. Preferred stock dividends declared and paid $20,000 on December 31, 2015.

Required:

(1) Prepare a schedule showing your calculation of adjusted 2015 net income from continuing operations.

(2) Prepare a partial Income Statement for 2015 beginning with adjusted net income from continuing operations. Include all necessary earnings per share information assuming ABC Corp had 100,000 common stock shares outstanding throughout the year.

(3) Prepare the 2015 Retained Earnings Statement.