At the beginning of its Year 3 accounting period, Canvas, Inc had retained earnings of $10,000,000 During Year 3, Canvas reported income from continuing operations before taxes of $1,500,000 The following additional transactions occurred in Year 3 but were not included in the $1,500,000 Assume all of the following were material During Year 3, Canvas decided to sell an unprofitable segment of its business The sale of this segment qualifies as a discontinued operation for financial reporting purposes However, at the end of Year 3, the company had yet to sell the segment On December 31, Year 3 the segment assets had a fair value minus anticipated costs to sell of $4,000,000 and a book value of $3,500,000 For the year, the segment reported an operating loss of $400,000 At July 1 st , Year 1, the company purchased a machine for $75,000 and no salvage value that had a useful life of 5 years The bookkeeper used straight line depreciation for Year 1, Year 2 and Year 3 but erroneously deducted a salvage value of 10,000 when computing the depreciation base Canvas declared and paid cash dividends of $80,000 on its common stock The dividend was erroneously recorded as an expense and is included in the $1,500,000 Canvas had a restructuring charge of $45,000 (pre tax) REQUIRED Answer the two questions below 1) Use all of the information above to prepare a Year 3 income statement for the Canvas Company beginning with income from continuing operations before tax Assume an income tax rate of 40 2) What is the ending balance of retained earnings as of December 31, Year 3

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on May 13, 2022

At the beginning of its Year 3 accounting period, Canvas, Inc. had retained earnings of $10,000,000. During Year 3, Canvas reported income from continuing operations

At the beginning of its Year 3 accounting period, Canvas, Inc. had retained earnings of $10,000,000. During Year 3, Canvas reported income from continuing operations before taxes of $1,500,000. The following additional transactions occurred in Year 3 but were not included in the $1,500,000. Assume all of the following were material.

During Year 3, Canvas decided to sell an unprofitable segment of its business. The sale of this segment qualifies as a discontinued operation for financial reporting purposes. However, at the end of Year 3, the company had yet to sell the segment. On December 31, Year 3 the segment assets had a fair value minus anticipated costs to sell of $4,000,000 and a book value of $3,500,000. For the year, the segment reported an operating loss of $400,000.
At July 1^st, Year 1, the company purchased a machine for $75,000 and no salvage value that had a useful life of 5 years. The bookkeeper used straight-line depreciation for Year 1, Year 2 and Year 3 but erroneously deducted a salvage value of 10,000 when computing the depreciation base.
Canvas declared and paid cash dividends of $80,000 on its common stock. The dividend was erroneously recorded as an expense and is included in the $1,500,000.
Canvas had a restructuring charge of $45,000 (pre-tax).

REQUIRED: Answer the two questions below.

1) Use all of the information above to prepare a Year 3 income statement for the Canvas Company beginning with income from continuing operations before tax. Assume an income tax rate of 40%.

2) What is the ending balance of retained earnings as of December 31, Year 3?