QUESTION TWO.

(A) DK Company's net incomes for the past three years are presented below:

201920182017

sh.480, 000sh.450, 000sh.360, 000

During the 2019 year-end audit, the following items come to your attention:

1.DK bought a truck on January 1, 2016 for sh.196, 000 with a sh.16, 000 estimated residual value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method)

2.During 2019, DK changed from the straight-line method of depreciating its cement plant to the double-declining balance method. The following computations present depreciation on both bases:

2019 2018 2017

Straight-line36,00036,00036,000

Double-declining46,08057,60072,000

The net income for 2019 was computed using the double-declining balance method, on the January 1, 2019 book value, over the useful life remaining at that time. The depreciation recorded in 2019 was sh.72, 000.

3.DK, in reviewing its provision for uncollectible during 2019, has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2018 and 2019 when the expense had been sh.18, 000 and sh.12, 000, respectively. The company recorded bad debt expense under the new rate for 2019. The company would have recorded sh.6, 000 less of bad debt expense on December 31, 2019 under the old rate.

Required

(a)Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year.

(b)Compute the net income to be reported each year 2017 through 2019.

(c)Assume that the beginning retained earnings balance (unadjusted) for 2017 was sh.1, 260,000. At what adjusted amount should this beginning retained earnings balance for 2017 be stated, assuming that comparative financial statements were prepared?

(d)Assume that the beginning retained earnings balance (unadjusted) for 2019 is sh.1, 800,000 and that non-comparative financial statements are prepared. At what adjusted amount should this beginning retained earnings balance be stated?

(B) FG Company has the following capital structure at the beginning of the year:

Share capitalpreference 6%, sh.50 par value, 20,000 shares authorized,

6,000 shares issued and outstandingsh.300,000

Share capitalordinary, sh.10 par value, 60,000 shares authorized,

40,000 shares issued and outstanding400,000

Share premiumordinary110,000

Retained earnings440,000

Total equitysh.1, 250,000

Required

(a)Record the following transactions which occurred consecutively (show all calculations).

1.A total cash dividend of sh.90, 000 was declared and payable to shareholders of record. Record dividends payable on ordinary and preference shares in separate accounts.

2.A 10% ordinary share dividend was declared. The average fair value of the ordinary shares is sh.18 a share.

3.Assume that net income for the year was sh.150, 000 (record the closing entry) and the board of directors appropriated sh.70, 000 of retained earnings for plant expansion.

(b)Construct the equity section of FG Company after incorporating all the above information.