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ABC is a private company, which started on 1/1/Y1.They only report one year of financial data on their financial statements. Their tax rate is 40%.

ABC is a private company, which started on 1/1/Y1.They only report one year of financial data on their financial statements. Their tax rate is 40%.

For each of the scenarios below determine the effect on current year income from operations before taxes and retained earnings, if necessary. Include the appropriate dollar amounts.

Scenario 1:

ABC purchased a piece of equipment on 1/1/Y2.They determined that straight-line was the appropriate depreciation method. However, when they calculated depreciation for Y2-Y4 they did not subtract salvage value, resulting in depreciation expense of $1,000 per year.If they had subtracted salvage value depreciation expense for each year would have been $700. Depreciation expense was already included in income from operations before taxes for Y4 before the error was detected.

What adjustment is required to Y4 Income from Operations before Taxes?

What is the correcting journal entry for the retrospective adjustment to RE (if required) in Y4?

Scenario 2:

ABC changed from LIFO to FIFO in Y4. COGS under the new method would have been $2,000 higher for Y1, $1,000 lower for Y2, $3,000 higher for Y3 and $750 lower for Y4.COGS using LIFO was already included in income from operations before taxes for Y4 before the company decided to switch to FIFO.

What adjustment is required to Y4 Income from Operations before Taxes?

What is the correcting journal entry for the retrospective adjustment to RE (if required) in Y4?

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