Pacific Alliance Limited (PAL) as determined a preliminary pre-tax income $550,000

for the year ended December 31, 2020. The following Statement of Retained

Earnings, as published, for the year ended December 31, 2019.

Retained earnings, January 1, 2019..........$3,893,000

Net income...................834,000

Capital deficiency charges.....(27,000)

Dividends declared.......(200,000)

Retained earnings, December 31, 2019...$4,500,000

Dividends paid during 2020 were $270,000 with dividends payable balances at the

end of 2019 and 2020 of $60,000 and $90,000 respectively. During 2020, PAL

redeemed common shares at a cost $22,000 less than the carrying value of the

shares.

The following information is available before the 2020 financial year end is finalized.

1. In January, 2019, the company acquired capital assets for $2,200,000 + 5%

GST. At that time, these assets had an estimated useful life of 10 years with

a salvage value of $350,000 and were being amortized on a straight line

basis. In 2019, the company received a government grant of $400,000

relating solely to the capital asset purchase, as an economic development

incentive which the accountant credited to miscellaneous income.

Management realized early in 2021, while the audit was being performed on

the 2020 acconts, that this grant should have reduced the cost of the asset

but the accountant had already provided for depreciation for 2020 based on

the $2,200,000 cost.

2. PAL applied Weighted Average inventory valuation in the determination of

the above preliminary net income. The company has considered industry

practice and will change its method of inventory valuation to FIFO cost

effective with 2020 and has determined that this policy should be applied

retrospectively. Inventory balances under the two valuation bases have been

determined to be as follows:

Year-end FIFO Weighted Average

2017 $400,000 $398,000

2018 440,000 425,000

2019 470,000 452,000

2020 500,000 476,000

3. PAL's tax rate is 25% for all years.

Requirement 1

Prepare a schedule detailing the calculation of the correct/revised net (after tax)

income to report for 2020. Show any supporting calculations, as needed, for any

adjustments to the preliminary, pre-tax income. Hint: prepare one tax expense for

the final adjusted pre-tax income.

Unadjusted income before taxes ................$550,000

Net income, after tax..................$

Supporting calculations:

Requirement 2 (the enabling entries)

Prepare all applicable entries, with supporting computations, required to reflect the

above events (items 1 &2) to finalize the 2020 financial year end. Note the

distinction and provide entries as grouped below.

Entries required to adjust the beginning-of-year financial position. Apply

the 'deferred tax liability' account, if needed, for any associated tax

adjustments.

(these entries will be SFP entries only):

Entries required to adjust the current year's preliminary income (accounts

not yet closed to retained earnings).

Requirement 3

Prepare, in good form, the comparative statement of retained earnings for the

years ended December 31, 2020 and December 31, 2019. PAL wishes to itemize

the effect of any adjustments to retained earnings separately and not combine any

events.

Pacific Alliance Limited

Statement of Retained Earnings

For the years ended December 31, 2020 and December 31, 2019

2020 2019

Retained earnings, as reported $4,500,000 $3,893,000

Supporting computations: