Reference no: EM132967220

Problem - The accountant preparing the income statement for PePal Ins. had some doubts about the  -appropriate accounting treatment of the six items listed below during the fiscal year ending December 31, 2020. Assume a tax rate of 40%.

1. The corporation disposed of its computer goods division during 2020. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $150,000 before taxes and a loss of $20,000 before taxes on the disposal of the division. All of these events occurred in 2020 and have not been recorded.

2. The company recorded advances of $15,000 to employees made December 31, 2020 as Salaries and Wages Expense.

3. Dividends of $10,000 during 2020 were recorded as an operating expense.

4. In 2020, Pepal Ins. changed its method of accounting for inventory from the first-in first-out method to the average cost method. Inventory in 2020 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement.

5. Office equipment purchased January 1, 2020 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected residual value. Pepal Ins. uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been corrected.

6. On January 1, 2020, Pepal bought a building that cost $85,000, had an estimated useful life of ten years, and had a residual value of $5,000. Pepal uses the straight-line depreciation method to depreciate the building. In 2020, it was estimated that the remaining useful life was eight years and the residual value was zero. Depreciation expense reported on the 2020 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made.

Required -

1. For each item, indicate corrections to income from continuing operations before taxes, if any. Denote any negative numbers by using brackets < >.

2. At January 1, 2020, Pepal Inc.'s retained earnings balance was $200,000. Assume that income before income tax and after correctly considering any of the six additional items in question 1 was $1,000,000. Prepare the income statement and retained earnings statement. Denote negative numbers by using brackets < >. Do not disclose earnings per share data.