While preparing the income statement for WESTON, Inc., the accountant had some doubts about the appropriate accounting treatment of the five items listed below during the fiscal year ending December 31, 2016. Assume a tax rate of 35 percent.
a. Office equipment purchased April 1, 2016 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected salvage value. WESTON uses the straight-line method to depreciate office equipment for financial reporting purposes.
b. The corporation disposed of its sporting goods division during 2016. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $80,000 before taxes on the disposal of the division. All of these events occurred in 2016 and have not been recorded.
c. The company recorded advances of $12,000 to employees made in December 31, 2016 as Salaries and Wages Expense.
d. Dividends of $10,000 during 2016 were recorded as an operating expense.
e. In 2016, WESTON changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2016 was correctly recorded using the average cost method. The effect of this change on prior years is to increase 2014 cost of goods sold by $60,000 (before taxes) and decrease 2015 cost of good sold by $20,000 (before taxes). Assume WESTON, Inc. began operations on January 1, 2014.
1. For each item, record corrections to income from continuing operations before taxes, if any.
2. State where the items that do not affect income from continuing operations should be shown.
a) Income will go up by $40,000. The item should be reported under assets, as a result profit before taxes would rise by another $60,000 but increase in asset would result in increased depreciation by $20,000(60000/3), hence 60000-20000 will give us the correct treatment.
b)Income will rise by another $30,000 (1,10,000-80,000). Loss arising from the division should be set off from the income arised from that segment – This item will not affect income from continuing operations, but as a whole company income will get lower.
c) Advances given to employees are just prepayment of the expenditure, hence they should be reported under assets side, as a result income will increase by another $12,000
d) Dividends paid will not be an expenditure to the company, because it is just appropriation of profits and not charge against profit. So !0,000 $ should be added to the profit.
e)Because of the change in the method of valuation of inventory, there will be a change in cost of goods sold by 40,000 $ which should be reduced from the current year income.