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ABC Inc. began operations on January 1, Y1. During its first three years of operations, ABC reported net income and declared dividends as follows: Year

ABC Inc. began operations on January 1, Y1. During its first three years of operations, ABC reported net income and declared dividends as follows:

Year

Y1

Y2

Y3

Y4

Net Income

$50,000

$75,000

$125,000

$150,000

Dividends

$0

$10,000

$0

$50,000

The following information relates to Y5.

  • Net income was originally calculated as $200,000 and no dividends were declared during the period.
  • Assume ABC is charged a tax rate of 30%.
  • Additionally, ABC discovered in Y5 that they understated depreciation expense in Y3 by $25,000 and understated Y4 depreciation expense by $20,000.

At the end of Y5, after the net income above was determined ABC decided to change from FIFO to LIFO. The following COGS information was determined under each method. The net income number given above was calculated for Y5 using FIFO.

Year

Y1

Y2

Y3

Y4

Y5

FIFO COGS

$135,000

$115,000

$140,000

$150,000

$145,000

LIFO COGS

$120,000

$130,000

$110,000

$100,000

$115,000

ABC reported two years on the face of the income statement during Y5.

  1. Using the information given complete the Y4 and Y5 Statements of Retained Earnings as reported in the Y5 Annual Report. Use a parenthesis to indicate a negative balance (or subtraction).

2. What is the correcting entry (or you can separate into separate entries) required to fix he depreciation errors in Y3 and Y4?

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