Martinez Corporation began operations on January 1, 2017. Recently the corporation has had several unusual accounting problems related to the presentation of its income statement for financial reporting purposes. The company follows ASPE. You are the CPA for Martinez and have been asked to examine the following data: MARTINEZ CORPORATION Income Statement For the Year Ended December 31, 2020 Sales revenue $9,700,000 Cost of goods sold 6,020,000 Gross profit 3,680,000 Selling and administrative expense 1,328,000 Income before income tax 2,352,000 Income tax expense (40%) 940,800 Net income $1,411,200 This additional information was also provided: 1. The controller mentioned that the corporation has had difficulty collecting certain receivables. For this reason, the bad debt accrual was increased from 1% to 2% of sales revenue. The controller estimates that, if this rate had been used in past periods, an additional $81,300 worth of expense would have been charged. The bad debt expense for the current period was calculated using the new rate and is part of selling and administrative expense. 2. There were 300,000 common shares outstanding at the end of 2020. No additional shares were purchased or sold in 2020. 3. The following items were not included in the income statement: Inventory in the amount of $115,000 was obsolete. The company announced plans to dispose of a recognized segment. For 2020, the segment had a loss, net of tax, of $169,200. 4. Retained earnings as at January 1, 2020, were $3 million. Cash dividends of $800,000 were paid in 2020. 5. In January 2020, Martinez changed its method of depreciating plant assets from the straight-line method to the declining-balance method to present more relevant information. The controller has prepared a schedule that shows what the depreciation expense would have been in previous periods if the declining-balance method had been used. Depreciation Expense Depreciation Expense under under Straight-Line Declining-Balance Difference 2017 $70,000 $140,000 $70,000 2018 70,000 105,000 35,000 2019 70,000 78,750 8,750 $210,000 $323,750 $113,750 6. In 2020, Martinez discovered that in 2019 it had failed to record $20,000 as an expense for sales commissions. The sales commissions for 2019 were included in the 2020 expenses. Your answer is partially correct. Try again. Prepare the income statement for Martinez Corporation. The effective tax rate for past years was 40%. (Hint: a change in depreciation method is considered a change in estimate, not a change in accounting policy.) Martinez Corporation Income Statement For the Year Ended December 31, 2020 Sales Revenue 9700000 Cost of Goods Sold 6020000 Gross Profit/ (Loss) 3680000 Selling and Administrative Expenses 1308000 Loss on Inventory Due To Decline in NRV 115000 Selling and Administrative Expenses 13080001 Loss on Inventory Due To Decline in NRV 115000 Total Operating Expenses 1423000 Income before Income Tax and Discontinued Operations 2257000 Income Tax Expense 902800 Income before Discontinued Operations 1354200 Discontinued Operations Loss from Operation of Discontinued Segment (Net of Tax) 184800 Net Income / (Loss) 1169400 LINK TO TEXT LINK TO TEXT LINK TO TEXT LINK TO TEXT Prepare a combined statement of net income and retained earnings. (List items that increase retained earnings first once the opening balance is adjusted.) Martinez Corporation Statement of Income and Retained Earnings For the Year Ended December 31, 2020 Sales Revenue Loss on Inventory Due To Decline in NRV X X X X DOIDO x x x Sales Revenue Cost of Goods Sold Selling and Administrative Expenses Gain from Operation of Discontinued Segment (Net of Tax) Income Before Income Tax and Discontinued Operations Loss on Inventory Due To Decline in NRV Gain On Inventory Due To Decline in NRV Loss from Operation of Discontinued Segment (Net of Tax) UUU X X X X x
