Reference no: EM133035490
Question - Prior to the completion of the 2020 financial statements, Fiat, Inc. CEO Mario was chatting with his chief accountant, Luigi, about several transactions that had occurred or were discovered in the current year. The transactions being discussed were:
-Overstatement of depreciation expense in 2019, by $82,000. The error was discovered during the internal audit for 2020.
-A strike by a competitor resulted in a loss of revenue to Fiat of $125,000.
-Flood damage to one of the Fiat facilities resulted in a $16,000 loss prior to insurance coverage of $5,000. The insurance payment was received in 2020.
-During 2020, Fiat switched from units of production depreciation to straight line depreciation on its delivery trucks. Pertinent data (annualized) related to this switch are:
Units of Production Depreciation Straight line depreciation
2020 $220,000 $190,000
2019 250,000 190,000
2018 170,000 190,000
At year end, it was determined that the life of a group of manufacturing machines was incorrectly estimated at the time of acquiring those machines. Luigi determined that a change in depreciation amount based on the new expected life of the assets was warranted and the change should be made before the 2020 books are closed and the financial statements are published. Here are the details:
Original Cost 5,000,000
Original Life 15 years
Original Residual 200,000
Depreciation Method Straight line
Years Owned to Date 6
Revised total life 11
Revised residual 50,000
Fiat's fiscal year end is 12-31 and the company presents two years of income statement data upon publication of their financial statements. Their tax rate is 40%. Retained earnings at the beginning of 2020 was $10,575,000, and $300,000 dividends were declared and paid on common stock during 2020. Income before taxes for 2020 was $1,048,000 excluding any of the items listed above that may impact 2020 net income.
-What amount, if any, is recorded pre-tax for correction(s) of an error in 2020?
-What amount, if any, is the pre-tax cumulative effect of an accounting change in 2020?
-What amount, if any, is the pre-tax change in accounting estimate in 2020?
-What would be correct net income for 2020?
-What would be ending retained earnings for 2020?