Income from continuing operations and retained earnings The accountant preparing the income statement for SMC had some doubts about the appropriate accounting treatment of the six items listed below during the fiscal year ending December 31, 2023. Some of the six items have already been recorded in income from continuing operations while others have not yet been recorded. If needed, assume a tax rate of 40 percent. Required: for each of the six items, decided whether A) the item needs to be adjusted in Income from Continuing Operations, B) the item needs to be reported below Income from Continuing Operations, or C) reported on the Statement of Retained Earnings. 1. Office equipment purchased January 1, 2023, for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected salvage value. SMC uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been corrected. 2. 4. 5. 6. The corporation disposed of its sporting goods division during 2023. This disposal is considered a major shift in strategy. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $20,000 before taxes on the disposal of the division. All these events occurred in 2023 and were included in income from continuing operations before taxes. The company recorded advances of $10,000 to employees made December 31, 2023 as Salaries and Wages Expense. Dividends of $10,000 during 2023 were recorded as an operating expense. In 2023, SMC changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2023 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement. On January 1, 2019, SMC bought a building that cost $85,000, had an estimated useful life of ten years, and had a salvage value of $5,000. SMC uses the straight-line depreciation method to depreciate the building. In 2023, it was estimated that the remaining useful life was eight years, and the salvage value was zero. Depreciation expense reported on the 2023 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made. Income Statement Income from continuing operations (before taxes) (as originally reported) Income from continuing operations (before tax) Tax expense (40%) Income from continuing operations Net Income For the Year Ending 2023 80,000 80,000 32,000 48,000 48,000 Retained Earnings Statement Beginning balance (as originally reported) Adjustments to beginning balance: 125,000 Required: For each of the six items, you will either adjust Income from Continuing Operations (if it needs adjusting), determine whether the amount is reported below Income from continuing operations, or is reported on the Statement of Retained Earnings. If there is no adjustment, do not enter any numbers. There are more cells provided than needed. For Pull-down Menus (do not change) Office equipment rather than supply expense Disposal of sporting goods division Advances classified as expense Dividends treated as expense Change in inventory Change in estimate Adjusted Beginning balance 125,000 + Net income 48,000 Ending balance Retained Earnings 173,000