Technical Problem #2 relates to chapter 4 Income Statement and Related Information. It requires you to complete a problem on the reporting of income and changes in retained earnings, including the effects of irregular items, accounting changes and other comprehensive income.

Problem

Paige Co. is a niche furniture manufacturer and retailer who operates mainly in the Carolinas. A partial trial balance showing Paiges equity, revenue and expense balances as of its December 31, 2019 year-end follows:

Debits Credits

Dividends $ 274,520

Retained earnings (1/1/19) $ 714,830

Unrealized holding gain CKB bonds (1/1/19) 89,145

Interest revenue 21,690

Sales revenue 8,432,265

Bad debt expense 104,710

Cost of goods sold 5,258,345

Depreciation expense 219,480

Insurance expense 92,305

Interest expense 113,925

Salaries and wages expense 1,906,670

Utilities expense 193,255

In addition, the following information is available for the company for 2019. Unless indicated otherwise, this information has not yet been reflected in the companys accounts. All of the dollar amounts are stated on a before-tax basis.

1. In February 2019, Paige shifted its business strategy, resulting in the October 2019 sale of a component of the company considered a separate major line of business. The sale produced a gain on disposal of $94,280. The operations of the component, prior to the sale in October, produced a loss of $19,415.

2. In preparing its 2019 financial statements, Paige has determined that it must write off $79,510 of its recorded goodwill.

3. At year-end 2019, Paige decided to change its inventory cost flow method from Average Cost to First-in, First-out (FIFO). The effect of the change on 2019 and prior years is as follows:

2019 Prior Years

Cost of goods sold Average Cost $5,258,345 $18,421,000

Cost of goods sold FIFO 5,079,620 18,109,000

Note The cost of goods sold figure in Paiges partial trial balance above reflects use of the old method (Average Cost) for 2019.

4. Paige restructured its ongoing operations during 2019, resulting in restructuring charges of $32,925.

5. At year-end 2019, Paige is reviewing the percentage it uses to estimate bad debts. With economic conditions improving, the company determines that it must decrease the percentage it uses to estimate bad debts from 6.95% to 5.70%. The effect of this change on 2019 income is as follows:

Bad debt expense based on a 6.95% rate (old rate) $104,710

Bad debt expense based on a 5.70% rate (new rate) 96,530

Note The bad debt expense figure in the partial trial balance above reflects use of the old rate (6.95%) for 2019.

6. In July 2019, Paige extinguished 7% bonds payable having a book value of $532,590. Paige paid the investors $598,735 to retire these bonds.

7. In 2013, Paige purchased bonds issued by CKB Co., which it continues to hold as an available-for-sale investment. The fair value of Paiges investment decreased in 2019, from $461,880 to $414,915.

Note The $89,145 Unrealized holding gain CKB bonds (1/1/19) in the partial trial balance above relates to this item and, of course, is stated net of income taxes.

8. In 2017, Paige purchased certain equipment and began using it. In the process of preparing the adjusting entries at year-end 2019, Paige discovered that it mistakenly double-counted the equipments estimated salvage value in the depreciation calculations for 2017 and 2018. The total amount of understatement of depreciation expense for these two years was $37,615.

Note The discovery and correction of the 2017 and 2018 errors will not change the depreciation expense for 2019. The $219,480 figure in the partial trial balance above is correct.

Assume the above amounts are material. Also, assume the income tax rate applicable to all years and all income items is 25%. Finally, note that Paige uses the multiple-step format for the reporting of net income items and the one-income statement approach for the display of other comprehensive income items.

Instructions

Prepare the financial statements for the year ended December 31, 2019 to show the proper reporting of Paiges:

1. income and

2. changes in retained earnings.

Prepare these statements in good form, according to GAAP requirements. Refer to models of the financial statements in the textbook (pages 4-1 to 4-25), the practice problems and the class notes and examples.

Please observe the following checklist of instructions as you complete this assignment:

Prepare your financial statements and any supporting analyses using Excel.

Give careful attention to your formatting of information. Formatting includes effective presentation of information, correct spelling and capitalization, and proper use of dollar signs, commas, and underscoring. Refer to examples in the text for guidance.

Round all dollar amounts you present in your financial statements to the nearest dollar.