Zephyr Corporation began operations on January 1, 2017. Recently the corporation has had several unusual accounting problems related to the presentation of its income statement for financial reporting purposes. The company follows ASPE.

You are the CPA for Zephyr and have been asked to examine the following data:

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Zephyr Corporation? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?Income Statement? ? ? ? ? ? ? ? ?For the Year Ended December 31, 2020

Sales revenue .......................................................... $9,500,000Cost of goods sold .................................................... 5,900,000Gross profit ............................................................... 3,600,000Selling and administrative expense ....................... 1,300,000Income before income tax ...................................... 2,300,000Income tax expense (30%) ......................................... 690,000Net income ............................................................. $1,610,000

This additional information was also provided:

1. The controller mentioned that the corporation has had difficulty collecting certain receivables. For this reason, the bad debt accrual was increased from 1% to 2% of sales revenue. The controller estimates that, if this rate had been used in past periods, an additional $83,000 worth of expense would have been charged. The bad debt expense for the current period was calculated using the new rate and is part of selling and administrative expense.

2. There were 400,000 common shares outstanding at the end of 2020. No additional shares were purchased or sold in 2020.

3. The following items were not included in the income statement:

? Inventory in the amount of $112,000 was obsolete.

? The company announced plans to dispose of a recognized segment. For 2020, the segment had a loss, net of tax, of $162,000.

4. Retained earnings as at January 1, 2020, were $2.8 million. Cash dividends of $700,000 were paid in 2020.

5. In January 2020, Zephyr changed its method of depreciating plant assets from the straight-line method to the declining-balance method to present more relevant information. The controller has prepared a schedule that shows what the depreciation expense would have been in previous periods if the declining-balance method had been used.

6. In 2020, Zephyr discovered that in 2019 it had failed to record $20,000 as an expense for sales commissions. The sales commissions for 2019 were included in the 2020 expenses.

Instructions

a. Prepare the income statement for Zephyr Corporation. The effective tax rate for past years was 30%. A change in depreciation method is considered a change in estimate, not a change in accounting policy.

b. Prepare a combined statement of net income and retained earnings.

c. Digging Deeper From the perspective of the reader of the financial statements, what is the purpose of intraperiod tax allocation for the statements of income and retained earnings?

Transcribed Image Text:

Depreciation Expense under Depreciation Expense under Straight-Line Difference Declining-Balance $ 75,000 $ 75,000 2017 2018 2019 $150,000 75,000 112,500 84,375 37,500 9,375 75,000 $121,875 $346,875 $225,000