Question
The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the six items listed below during the
The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the six items listed below during the fiscal year ending December 31, 2019. Assume a tax rate of 40 percent.
1.The corporation disposed of its sporting goods division during 2019. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of150,000 before taxes and a loss of20,000 before taxes on the disposal of the division. All of these events occurred in 2019 and have not been recorded.
2.The company recorded advances of15,000 to employees made December 31, 2019 as Salaries and Wages Expense.
3.Dividends of $10,000 during 2019 were recorded as an operating expense.
4.In 2019, Bakersfield changed its method of accounting for inventory from the first-in first-out method to the average cost method. Inventory in 2019 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional125,000 of cost of goods sold (before taxes) being reported on prior years' income statement.
5.Office equipment purchased January 1, 2019 for60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected residual value. Bakersfield uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been corrected.
6.On January 1, 2015, Bakersfield bought a building that cost85,000, had an estimated useful life of ten years, and had a residual value of5,000. Bakersfield uses the
straight-line depreciation method to depreciate the building. In 2019, it was estimated that the remaining useful life was eight years and the residual value was zero. Depreciation expense reported on the 2019 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made.
Part A.For each item, indicate corrections to income from continuing operations before taxes, if any.Denote any negative numbers by using brackets <>.
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