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USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:

Sparky Inc. reported income from continuing operations for theyear ended December 31, 2014 of $790,000. Sparky has a 30% taxrate. Upon review of additional information that just becameavailable, Sparky feels this calculation might be in error:

At the beginning of 2012, Sparky purchased a machine for$540,000 (salvage value of $40,000) that had a useful life of 5years. The bookkeeper used straight-line depreciation for 2012,2013 and 2014, but failed to deduct the salvage value in computingthe depreciation expense each year.

Based on this new information, determine the correctIncome from Continuing Operations for the period ended December 31,2014:

Referring to the information presented in the question directlyabovbe, determine the Prior Period Adjustment (after tax) thatshould be reported on Sparky's Retained Earnings Statement. If thecorrection to prior years income (after tax) should increase thebeginning retained earnings balance, enter your answer as apositive number. If the correction to prior years income (aftertax) should decrease the Retained Earnings balance, enter youranswer in parenthesis ( ).

Prior Period Adjustment (net of tax):

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Elin Hessel
Elin HesselLv2
28 Sep 2019

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P4-3
(Irregular Items) Maher Inc. reported income from continuingoperations before taxes during 2010 of $790,000. Additionaltransactions occurring in 2010 but not considered in the $790,000are as follows.

1. The corporation experienced an uninsured flood loss(extraordinary) in the amount of $90,000 during the year. The taxrate on this item is 46%.

2. At the beginning of 2008, the corporation purchased a machinefor $54,000 (salvage value of $9,000) that had a useful life of 6years. The bookkeeper used straight-line depreciation for 2008,2009, and 2010 but failed to deduct the salvage value in computingthe depreciation base.

3. Sale of securities held as a part of its portfolio resulted in aloss of $57,000 (pretax).

4. When its president died, the corporation realized $150,000 froman insurance policy. The cash surrender value of this policy hadbeen carried on the books as an investment in the amount of $46,000(the gain is nontaxable).

5. The corporation disposed of its recreational division at a lossof $115,000 before taxes. Assume that this transaction meets thecriteria for discontinued operations.

6. The corporation decided to change its method of inventorypricing from average cost to the FIFO method. The effect of thischange on prior years is to increase 2008 income by $60,000 anddecrease 2009 income by $20,000 before taxes. The FIFO method hasbeen used for 2010. The tax rate on these items is 40%.





Instructions
Prepare an income statement for the year 2010 starting with incomefrom continuing operations before taxes. Compute earnings per shareas it should be shown on the face of the income statement. Commonshares outstanding for the year are 120,000 shares. (Assume a taxrate of 30% on all items, unless indicated otherwise.)

I saw someone put the beginning income at 839,500.why?

Exercise 4-12 Pharoah Corporation began operations on January 1,2014. During its first 3 years of operations, Pharoah reported netincome and declared dividends as follows: Net income Dividendsdeclared 2014 $43,400 $ –0– 2015 131,800 57,500 2016 164,000 52,400The following information relates to 2017. Income before income tax$242,600 Prior period adjustment: understatement of 2015depreciation expense (before taxes) $34,700 Cumulative decrease inincome from change in inventory methods (before taxes) $36,100Dividends declared (of this amount, $34,700 will be paid on January15, 2018) $109,900 Effective tax rate 40 % Prepare a 2017 retainedearnings statement for Pharoah Corporation. (List items thatincrease adjusted retained earnings first.) PHAROAH CORPORATIONRetained Earnings Statement $ : : $ Assume Pharoah Corporationrestricted retained earnings in the amount of $75,260 on December31, 2017. After this action, what would Pharoah report as totalretained earnings in its December 31, 2017, balance sheet? Totalretained earnings $

Question 6

1. The market value ofFarmington Corp.'s common shares was quoted at $54 per share atDecember 31, 2018, and 2017. Planetarium 's balance sheet atDecember 31, 2018, and 2017, and statement of income and retainedearnings for the years then ended are presented below:

Farmington Corp.

Balance Sheet

December31

2018 2017

Assets:

Current assets:

Cash $ 9,000,000 $ 5,200,000

Short-terminvestments 17,200,000 15,400,000

Accountsreceivable(net) 109,000,000 111,000,000

Inventories,lower of cost ormarket 122,000,000 140,000,000

Prepaidexpenses 4,000,000 2,800,000

Total currentassets $261,200,000 $274,400,000

Property, plant, and equipment(net) 350,000,000 315,000,000

Investments, atequity 2,800,000 3,500,000

Long-termreceivables 15,000,000 20,000,000

Copyrights and patents(net) 6,000,000 7,000,000

Otherassets 8,000,000 9,100,000

Totalassets $643,000,000 $629,000,000

Liabilities and Stockholders' Equity:

Current liabilities:

Notespayable $ 7,000,000 $17,000,000

Accountspayable 55,000,000 52,000,000

Accruedexpenses 27,500,000 30,000,000

Income taxespayable 1,500,000 2,000,000

Current portionof long-termdebt 10,000,000 9,500,000

Total currentliabilities 101,000,000 110,500,000

Long-termdebt 180,000,000 190,000,000

Deferred incometaxes 69,000,000 65,000,000

Otherliabilities 15,000,000 9,500,000

Totalliabilities 365,000,000 375,000,000

Stockholders' equity:

Common stock,par value $1; authorized 20,000,000

shares; issued and outstanding 12,000,000shares 12,000,000 12,000,000

10% cumulativepreferred shares, par value $100;

$100 liquidating value; authorized 100,000 shares;

issued and outstanding 60,000 shares 6,000,000 6,000,000

Additionalpaid-incapital 119,000,000 119,000,000

Retainedearnings 141,000,000 117,000,000

Total stockholders'equity 278,000,000 254,000,000

Total liabilities and stockholders'equity $643,000,000 $629,000,000

Farmington Corp.

Statement of Income and Retained Earnings

Year ended December31

2018 2017

Netsales $540,000,000 $500,000,000

Cost and expenses:

Cost of goodssold 390,900,000 400,000,000

Selling, general, andadministrativeexpenses 70,000,000 65,000,000

Other,net 9,100,000 6,000,000

Total costs andexpenses 470,000,000 471,000,000

Income before incometaxes 70,000,000 29,000,000

Incometaxes 21,000,000 11,600,000

Netincome 49,000,000 17,400,000

Retained earnings at beginning ofperiod 117,000,000 113,100,000

Dividends on commonstock (24,400,000) (12,900,000)

Dividends on preferredstock (600,000) (600,000)

Retained earnings at end ofperiod $141,000,000 $117,000,000

Instructions

Based on the above information, compute the following (for theyear 2018 only): (Show supporting computations in good form.)

(a) Current ratio.

(b) Acid-test (quick) ratio.

(c) Accounts receivableturnover.

(d) Inventory turnover.

(e) Book value per share of common stock.

(f) Earnings per share.

(g) Price-earnings ratio.

(h) Payout ratio on common stock.

Question 7

1. Molina Company’s reportednet incomes for 2018 and the previous two years are presented

below.

2018 2017 2016

$105,000 $95,000 $70,000

2018’s net income was properly determined after giving effect tothe following accounting changes, error corrections, etc. whichtook place during the year. The incomes for 2016 and 2017 donot take these items into account and are stated at theamounts determined in those years. Ignore income taxes.

Instructions

(a) For each ofthe six accounting changes, errors, or prior period adjustmentsituations described below, prepare the journal entry or entriesMolina Company should record during 2018. If no entry is required,write “none.”

(b) Afterrecording the situation in part (a) above, prepare the year-endadjusting entry for December 31, 2018. If no entry, write“none.”

1. Early in 2018, Molina determined that equipment purchased inJanuary, 2016 at a cost of $1,290,000, with an estimated life of 5years and salvage value of $90,000 is now estimated to continue inuse until December 31, 2022 and will have a $30,000 salvage value.Molina recorded its 2018 depreciation at the end of 2018.

(a)

(b)

2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.

(a)

(b)

3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.

(a)

(b)

(a)

(b)

2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.

(a)

(b)

3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.

(a)

(b)

(a)

(b)

2. Molina determined that it had understated its depreciation by$20,000 in 2017 owing to the fact that an adjusting entry did notget recorded.

(a)

(b)

3. Molina bought a truck January 1, 2015 for $80,000 with a $8,000estimated salvage value and a six-year life. The company debited anexpense account and credited cash on the purchase date. The truckis expected to be traded at the end of 2020. Molina usesstraight-line depreciation for its trucks.

(a)

(b)

Question 8

1. On January 1, 2018, FoleyCompany (as lessor) entered into a noncancelable lease agreementwith Pinkley Company for machinery which was carried on theaccounting records of Foley at $9,060,000 and had a fair value of$9,600,000. Minimum lease payments under the lease agreement whichexpires on December 31, 2027, total $14,200,000. Payments of$1,420,000 are due each January 1. The first payment was made onJanuary 1, 2018 when the lease agreement was finalized. Theinterest rate of 10% which was stipulated in the lease agreement isthe implicit rate set by the lessor. The effective interest methodof amortization is being used. Pinkley expects the machine to havea ten-year life with no salvage value, and be depreciated on astraight-line basis. Collectibility of the payments is reasonablypredictable, and there are no important uncertainties surroundingthe costs yet to be incurred by the lessor.

Instructions

(a) From thelessee's viewpoint, what kind of lease is the above agreement? Fromthe lessor's viewpoint, what kind of lease is the aboveagreement?

(b) Whatshould be the income before income taxes derived by Foley from thelease for the year ended December 31, 2018?

(c) Ignoringincome taxes, what should be the expenses incurred by Pinkley fromthis lease for the year ended December 31, 2018?

(d) What journalentries should be recorded by Pinkley Company on January 1,2018?

Question 9

1. Information concerning the debt of Cole Company is as follows:

Short-term borrowings:

Balance at December 31,2017 $525,000

Proceeds from borrowings in2018 325,000

Payments made in2018 (450,000)

Balance at December 31,2018 $400,000

Current portion of long-term debt:

Balance at December 31,2017 $1,625,000

Transfers from caption "Long-TermDebt" 500,000

Payments made in2018 (1,225,000)

Balance at December 31,2018 $ 900,000

Long-term debt:

Balance at December 31,2017 $9,000,000

Proceeds from borrowings in2018 2,250,000

Transfers to caption "Current Portion of Long-TermDebt" (500,000)

Payments made in2018 (1,500,000)

Balance at December 31,2018 $9,250,000

In preparing a statement of cash flows for the year ended December31, 2018, for Cole Company, cash flows from financing activitieswould reflect

$2,000,000

$2,250,000

$2,575,000

$3,175,000

Question 10

1. Edwards Companycontracted on 4/1/17 to construct a building for $4,800,000. Theproject was completed in 2019. Additional data follow:

2017 2018 2019

Costs incurred todate $1,120,000 $2,700,000 $3,800,000

Estimated cost tocomplete 2,080,000 900,000 —

Billings todate 1,000,000 3,800,000 4,800,000

Collections todate 800,000 2,600,000 4,400,000

Instructions

(a) Calculate theincome recognized by Edwards under the percentage-of-completionmethod of accounting in each of the years 2017, 2018, and 2019.

(b) Prepare allnecessary entries for the year 2018.

(c) Present thebalance sheet disclosures at December 31, 2018. Proper headings orsubheadings must be indicated.

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