Question
Faices Company Inc. sells computing equipment and also provides consulting service. Its net incomes for the past three years are presented below. Faices has NOT
Faices Company Inc. sells computing equipment and also provides consulting service. Its net incomes for the past three years are presented below. Faices has NOT closed its 2020 accounting books.
| 2018 | 2019 | 2020 |
Net Income | $430,000 | $550,000 | $620,000 |
The following accounting changes and/or errors are noted for Faices in 2020.
- Faices has accounted for its long-term consulting contracts using the completed contract method prior to 2020. In 2020, it changed to the percentage-of-completion method. The following shows the differences of net income under the two methods for Faices's long-term consulting contracts in the prior years. Faices has reported its net income under the percentage of completion contract method (the new method) in 2020.
| 2018 | 2019 |
Percentage of completion (new method) | $250,000 | $107,000 |
Completed contract (old method) | $90,000 | $180,000 |
Differences | 160,000 | (73,000) |
B. In reviewing its warranty policy on equipment, Faices decided to change its estimates on warranty repairs. In prior years, Faices estimated 2% of its total sales would be returned for warranty repairs. As a result, the company has recorded warranty expense and estimated warranty liabilities of $90,000 under the old 2% estimate in 2020. In the review, Faices has determined that 3% of total sales is a more appropriate estimate for warranty expense. Under the new 3% estimate, the company would have recorded $31,000 more warranty expense and estimated warrant liabilities than that under the old 2% in 2020.
C. Faices found that it failed to record prepaid insurance expense of $28,500 in 2018, which understated its insurance expense and overstated its prepaid insurance expense by $28,500 in 2018.
Instructions
1. Considering the effects of the above items, restate the companys income statements for 2018-2020 by completing the following table. Ignore taxes.
| Comparative Income Statements | ||
| 2018 | 2019 | 2020 |
Net Income (unadjusted) | 430,000 | 550,000 | 620,000 |
Adjustments |
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Net Income (adjusted) |
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2. Considering the effects of the above items, report any cumulative effects on Faices's beginning retained earnings balance. Specifically, Faices reported unadjusted retained earnings of $1,260,000 at January 1, 2020. (1) calculate the adjusted retained earnings at January 1, 2020. (2) During 2019, Faices's paid $100,000 cash dividend. Calculate Faices's retained earnings at the end of 2020. Ignore taxes. Show the calculation for any partial credits.
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