Prepare comparative retained earnings statements for Madrasa Inc. for 2013 and 2
ID: 2491658 • Letter: P
Question
Prepare comparative retained earnings statements for Madrasa Inc. for 2013 and 2014. The company had retained earnings of $176,000 at December 31, 2012.
On December 31, 2014, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three pieces of equipment.1. Equipment A was purchased January 2, 2011. It originally cost $410,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2014, the decision was made to change the depreciation method from straight-line to sum-of-the-years’ digits, and the estimates relating to useful life and salvage value remained unchanged. 2. Equipment B was purchased January 3, 2010. It originally cost $192,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero salvage value. In 2014, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $2,800. 3. Equipment C was purchased January 5, 2010. The asset’s original cost was $183,200, and this amount was entirely expensed in 2010. This particular asset has a 10-year useful life and no salvage value. The straight-line method was chosen for depreciation purposes.
Additional data:
1. Income in 2014 before depreciation expense amounted to $410,000. 2. Depreciation expense on assets other than A, B, and C totaled $52,900 in 2014. 3. Income in 2013 was reported at $335,000. 4. Ignore all income tax effects. 5. 111,300 shares of common stock were outstanding in 2013 and 2014.
Explanation / Answer
Answer:
MADRASA INC.
Comparative Retained Earnings Statements
For the Years Ended
2014
2013
Retained earnings, January 1, as previously reported
$176,000
Add: Error in recording Asset C
128,240*
Retained earnings, January 1, as adjusted
$620,920
304,240
Add: Net income
239,430**
316,680***
Retained earnings, December 31
$860,350
$620,920
*Amount expensed incorrectly in 2010.............................................. $183,200
Depreciation to be taken to January 1, 2013
($18,320 X 3)................................................................................... 54,960
Prior period adjustment for income................................................. $128,240
**Income before depreciation expense (2014) $410,000
Depreciation for 2012
Asset A $71,750
Asset B 27,600
Asset C 18,320
Other 52,900 (170,570)
Income after depreciation expense $239,430
***Net income as reported..................................................................... $335,000
Depreciation—Asset C...................................................................... (18,320)
Net income as adjusted...................................................................... $316,680
2014
2013
Retained earnings, January 1, as previously reported
$176,000
Add: Error in recording Asset C
128,240*
Retained earnings, January 1, as adjusted
$620,920
304,240
Add: Net income
239,430**
316,680***
Retained earnings, December 31
$860,350
$620,920