Question
Trane Inc., is a food processing and distribution company. The Company had entered the healthy packaged food market a few years earlier but, due to
Trane Inc., is a food processing and distribution company. The Company had entered the healthy packaged food market a few years earlier but, due to sluggish sales, they divested (sold) the division in March of 2016. Also, throughout the year, the assembly workers went on strike, which shut down the food processing division for three weeks.
Trane, Inc, had the following account balances as of December 31, 2016.
Cash $1,334,250
Sales 4,136,500
Accounts receivables 253,500
Prepaid expenses 48,400
Sales returns and allowances 303,500
Allowance for doubtful accounts 11,410
Bad Debt Expense 85,500
Sales discounts 57,000
Loss from sale of health food division 75,800
Operating loss from health food division 5,200
Land 284,660
Equipment 295,500
Building 675,000
Inventory 217,000
Interest revenue 135,500
Dividend revenue 88,000
Cost of goods sold 1,869,500
Accumulated depreciation - equipment 81,000
Accumulated depreciation - building 234,525
Notes receivable 203,000
Accounts Payable 326,660
Bonds Payable 750,000
Accrued liabilities 198,500
Interest expense 93,000
Notes payable 129,500
Loss from employee strike 307,500
Common stock ($1 par) 300,000
Preferred stock (8%) 50,000
Retained earnings, December 31, 2015 386,500
Investment in Scully Company stock 300,000
Write off of inventory due to obsolescence 69,440
Common dividends 75,000
Preferred dividends 4,000
Gain on foreign currency translation 142,500
Supplies 44,560
Advertising expense 95,000
Depreciation Expense - Equipment 9000
Depreciation Expense - Building 15,635
Salaries expense 220,650
Utilities expense 48,000
Supplies expense 5,500
Rent expense 90000
Rent revenue 42,000
Income tax expense ?
Additional information:
A. The equipment was purchased January 1, 2007. It was discovered that the previous bookkeeper did not deduct salvage value when computing depreciation expense for the past eight years. The error was caught before this year's books were closed. Assume that the equipment had a $25,500 salvage value and 30 year useful life and that the straight-line depreciation method was used. (Note: The accumulated depreciation has been corrected for you in this problem. You only need to determine how to correct the previous years' income).
B. The building's use is allocated 65% to the Administrative department and 35% to the Sales department. The utilities are split evenly over the two departments. Assume that supplies, rent and salaries expenses are all administrative expenses.
C. There have been no additional issues or repurchases of common stock, so the number of shares reported is the weighted average shares outstanding for the year.
D. The company owns a spare warehouse that it rents to the neighboring business for $3,500 per month. (This is just to explain the reason for the rent revenue account).
E. The sale of the health food division meets the requirements to constitute a discontinued operation.
F. The tax rate on all items is 36%.
Required:
1. Prepare a MULTIPLE-STEP income statement, in good form, for the year ended December 31, 2016.
2. Prepare a Statement of Comprehensive Income for the year ended December 31st, 2016.
3. Prepare a Statement of Retained Earnings for the year ended December 31, 2016.
4. Suppose that, in the year 2017, the company decided that it would only use the equipment for six more years. Calculate the new depreciation expense that we would recognize in the year 2017. What type of change is this? How do we account for this type of change (retrospectively, current, prospectively?)
5. Suppose that the company was currently using FIFO to value its inventories and, in the year 2017, it decided to switch to LIFO. What type of change would this be? How would we account for this change?
6. Changing from FIFO to LIFO would violate which principle, constraint or assumption?
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