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You have been engaged to issue a review report for Tustin Company for the Year $2$ financial statements. The Year $1$ financial statements were also reviewed by you. Tustin Company has two segments: $(1)$ building and selling homes and $(2)$ renting apartments. Based on your inquiries with management on January $10,$ Year $3,$ you learned about some accounting changes from Year $1$ to Year $2.$ Tustin is going to present comparative financial statements.

For each inquiry response from management, click in the associated cells and select whether the correct accounting treatment for that particular response is to "Retrospectively" apply the change or account for the change "Prospectively."

In addition, assuming there are no other changes than the five mentioned below, determine the amounts that you believe you should see on the comparative financial statements for the income statement presented for Year $1.$ The prior year income statement is presented in the exhibit.

Tustin Company

Income Statement

For the Year Ended December $31,$ Year $1$

Net sales $$3,000,000$

Cost of sales $1,800,000$

Warranty expense $7,000$

General and administrative expenses $200,000$

Depreciation expense $80,000$

Interest income $10,000$

Loss from lawsuit $300,000$

Interest expense $40,000$

Income before taxes

$$583,000$amount will be $$400,000$

On January $1,$ Year $2,$ we decided to switch our inventory

valuation method from LIFO to FIFO. If we had used FIFO

in Year $1,$ cost of sales would have decreased by

$$100,000.$

In Year $1,$ the company changed from using the cash basis

$4$

to the accrual basis to account for its interest income.

Under the accrual basis, interest income in Year $1$ would

have resulted in an additional $$20,000$ of income.

In Year $1,$ we purchased a truck for $$20,000.$ We estimated

$5$ that it would have a $10-$year life. In Year $2,$ we changed the

useful life to $6$ years.

We sell a $3-$year home warranty with our homes. We

estimated that our warranty costs would be about $$350$ per

$6$

house sold in Year $1.$ Experience during Year $2$ indicated

that the estimate should have been $$375.$ We sold $20$

homes in Year $1$

Expected Numbers

$7$

for Voar $1$