1.Sparky Company is preparing its 2016 financial statements. Income from Continuing Operations (ICO) for 2016 was determined to be $1,000,000, but upon further review, Sparky's bookkeeper is not certain this number is accurate.
During 2016, Sparky declared preferred dividends of $70,000, paid $90,000 for dividends, and received $135,000 for dividends on available- for-sale equity securities. The bookkeeper did not include any of these when calculating ICO.
Determine the ADJUSTMENT to Sparky's Income from Continuing Operations (ICO) for this item. Sparky has a corporate tax rate of 30%.
If you need to increase ICO, enter your answer as a positive number; for instance: 3000
If you need to decrease ICO, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to ICO; enter 0
Calculation of Earnings applicable to common stockholders:
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Details
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Amount
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Income from continuous operations (before adjustment)
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$ 1,000,000
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mce_markernbsp; 135,000
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Income from continuous operations before tax
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$ 1,135,000
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Less: Taxes @30%
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mce_markernbsp; (340,500)
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Income from continuous operations
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mce_markernbsp; 794,500
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The decrease in continuous operations is -$205,500 (i.e., $1,000,000-$794,500).
2. Over the past 4 years, SPARKY has estimated bad debts based on 3.5% of credit sales. On May 1, 2016, after reviewing their major client's credit worthiness, they decided to change this estimate to 4.75%. If Sparky had used the 4.75% in the past, bad debt expenses would be $150,000 higher in prior years. During fiscal 2016, Sparky had earned sales revenues of $2,750,000 of which 20% were cash sales and 80% were credit sales. The bookkeeper calculated bad debt expenses for 2016 using the 3.5%.
Determine the ADJUSTMENT to Sparky's Income from Continuing Operations (ICO) for this item. Sparky has a corporate tax rate of 30%.
If you need to increase as a negative number; for instance: -3000
If you determine no change is needed to ICO; enter 0
ICO, enter your answer as a positive number; for instance: 3000
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Particulars
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Amount (in $)
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Annual sales revenue in 2016
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2750000.00
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Credit sales in 2016
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2200000.00
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Bad Debt expenses in 2016
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-77000.00
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Adjustment to past debt expenses
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-150000.00
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Adjustment Income from Continuing Operations
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-227000.00
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3. On April 1, 2014, Sparky purchased a truck for $50,000 with a salvage value of $7,000 and useful life of 5 years which was depreciated using the straight line method. On October 1, 2016, Sparky decided to change the salvage to $3,630 and a total useful life of 9 years. The bookkeeper has not recorded any depreciation on the truck for 2016.
Determine the ADJUSTMENT to Sparky's Income from Continuing Operations (ICO) for this item. Sparky has a corporate tax rate of 30%.
If you need to increase ICO, enter your answer as a positive number; for instance: 3000
If you need to decrease ICO, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to ICO; enter NE.
Depreciation = (cost - salvage value) / life of asset
= (50000 - 7000) / 5
= $8600
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Year
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Explanation
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Amount ($)
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2014
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April to December(8600*9/12)
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6450
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2015
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January to December
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8600
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Total accumulated depreciation (6450 + 8600)
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15050
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Depreciation = ((cost - accumulated depreciation) - salvage value) / remaining useful life of asset
= ((50000 - 15050) - 3600) / (9 - 1.75)
= $4320
The depreciation expense is not recorded for the year 2016. Therefore, the depreciation (net of tax) will decrease the income from continuing operations (ICO)
Decrease in ICO = depreciation - saving in tax
Saving in tax = 4320 * 30% = 1296
Decrease in ICO = 4320 - 1296 = 3024
The accountant has to decrease ICO = - 3024.
4. On July 1, 2012, Sparky purchased a machine for $200,000 with a salvage value of $8,000 and useful life of 20 years which was depreciated using the straight line method. On July 1, 2016, Sparky decided to change the salvage to $14,255 and a total useful life of 28 years. The bookkeeper used the old estimates in calculating ICO.
Determine the ADJUSTMENT to Sparky's Income from Continuing Operations (ICO) for this item. Sparky has a corporate tax rate of 30%.
If you need to decrease ICO, enter your answer as a negative number; for instance: -3000
If you need to increase ICO, enter your answer as a positive number; for instance: 3000
If you determine no change is needed to ICO; enter NE.
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Depreciation as per old salvage
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On 1st July 2012
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Value of the machine (a)
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200000
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Salvage value (b)
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8000
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Depreciable amount (c) (= a - b)
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192000
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No of years (d)
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20
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Depreciation per year (c/d)
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9600
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Depreciation for 2012
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4800
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Depreciation for 2013
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9600
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Depreciation for 2014
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9600
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Depreciation for 2015
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9600
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Depreciation for 2016 up to June 2016
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4800
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Total depreciation up to June 2016 (e)
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38400
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Book value of machine as at 1st July 2016 (a - e)
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161600
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Add old salvage value (+8000) (f)
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169600
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Depreciable amount (= 169600 less new salvage value (14255))
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155345
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Remaining useful life =28 - 4
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24
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Depreciation per year = 155345/24
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6473
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Depreciation from July 2016 to Dec 2016 = 6473 / 2
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3236
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Total depreciation for 2016 = 4800 + 3236
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8036
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Tax @ 30%
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2411
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Net amount considered in ICD =8036-2411
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5625
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ICD shall be decreased by $5625 in 2016
5. On July 1, 2012, Sparky purchased a plot of land for $158,500, but the bookkeeper incorrectly classified it and depreciated it as a building. The bookkeeper determined it had a $10,000 salvage value and a 15 year useful life and has used straight line depreciation since the day of purchase. The bookkeeper discovered this mistake in 2016 and has did not record any depreciation for this asset in 2016.
Determine the prior period adjustment to Retained Earnings that Sparky will record in a journal entry for 2016. Sparky has a corporate tax rate of 30%.
If you need to increase RE, enter your answer as a positive number; for instance: 3000
If you need to decrease RE, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to RE; enter 0
Since no depreciation is charged on Land, the accountant will have to reverse the effect (also known as prior period adjustment) of depreciation charged for the period July 1, 2012 to December 31st, 2015 (as the error was discovered in 2016). The amount of annual depreciation that must have been charged on land is:
Annual Depreciation = (Cost - Salvage Value)/Estimated Life
= (158500 - 10000)/15 = $9900
Depreciation for the Year 2012 = 9900*1/2 = $4950
Depreciation for the Years 2013 to 2015 = 9900*3 = $29700
Total Depreciation Charged on Land = 4950 + 29700 = $34650
We will have to record the adjustment after taking into account the tax. The after-tax value of depreciation will be = $34655*70% = $24255.
Deduction of depreciation would have resulted in a decrease in net income in the prior periods which would have reduced the amount transferred to retained earnings. Therefore, we will increase the balance of retained earnings by an amount of $24,255.
The prior period adjustment will be an addition to retained earnings for $24,255.
6. On May 1, 2013, Sparky received $337,800 for the sale of merchandise to a customer. The contract specified that Sparky would deliver their product in equal monthly quantities over 60 months. When Sparky recorded the sale the bookkeeper credited a nominal account. No adjusting or correcting entries were made and the bookkeeper realized the error after 2016 ICO was calculated.
Determine the ADJUSTMENT to Sparky's Income from Continuing Operations (ICO) for this item. Sparky has a corporate tax rate of 30%.
If you need to increase ICO, enter your answer as a positive number; for instance: 3000
If you need to decrease ICO, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to ICO; enter 0
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DETAILS
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AMOUNT
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Advance from customers
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$337800
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Total months
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60
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Monthly revenue (337800/60)
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$5630
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Revenue for 2013 (8months*5630)
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$45040
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Revenue for 2014
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$67560
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Revenue for 2015
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$67560
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Revenue for 2016
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$67560
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Total revenue earned until 2016
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$247720
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Unearned revenue (337800 - 247720)
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$90080
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Income for 2016
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Revenue (12*5630)
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$67560
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Less: tax 30%
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$20268
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Net income
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$47292
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7. Using the information in Question 6, determine the prior period adjustment to Retained Earnings that Sparky will record in 2016. Sparky has a corporate tax rate of 30%.
If you need to increase RE, enter your answer as a positive number; for instance: 3000
If you need to decrease RE, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to RE; enter 0
Retained earnings
Balance in retained earnings =337800*70% = $236460
Less: unearned portion = 90080*70% = $63056
Ending retained earnings = $236460 - $63056 = $173404
8. Sparky began doing business on January 1, 2012 using the Percentage of Completion to record construction revenues. During 2016, Sparky changed to the Completed Contract Method to record construction revenues to be consistent with industry practice. The bookkeeper used the Completed Contract Method for recording construction revenues in 2016. The company compiled the following comparative data:
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Percentage of Completion Method
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Completed Contract
Method
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2012
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$ 600,000
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$ 387,500
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2013
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$ 545,500
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$ 322,500
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2014
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$ 537,500
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$ 385,000
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2015
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$ 512,500
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$ 395,000
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2016
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$685,000
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$ 415,000
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Determine the ADJUSTMENT to Sparky's Income from Continuing Operations (ICO) for this item. Sparky has a corporate tax rate of 30%.
If you need to increase ICO, enter your answer as a positive number; for instance: 3000
If you need to decrease ICO, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to ICO; enter 0
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Year
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Percentage of completion method ($)
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Completed contract method ($)
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2012
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600000
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387500
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2013
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545500
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322500
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2014
|
537500
|
385000
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2015
|
512500
|
395000
|
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2016
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685000
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415000
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Total
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2880500
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1905000
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Income for 2016
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|
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Under completed contract method
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Revenue
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$415000
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Less 30% tax
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124500
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Net income
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$290500
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9. Using the information in Question 8, determine the cumulative effect adjustment to Retained Earnings that Sparky will recognize in the journal entry to record this accounting change. Sparky has a corporate tax rate of 30%.
If you need to increase RE, enter your answer as a positive number; for instance: 3000
If you need to decrease RE, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to RE; enter 0
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Retained earnings
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|
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Total revenue under percentage of completion method until 2016
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$2880500
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Less 30% tax
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$864150
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Net balance
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$2016350
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$2016350
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|
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10. Sparky reports 3 years of comparative financial statements (2016, 2015, and 2014). Using the information in Question 8, determine the cumulative effect adjustment to Retained Earnings that Sparky will recognize in the comparative financial statements to record this accounting change. Sparky has a corporate tax rate of 30%. If you need to increase RE, enter your answer as a positive number; for instance: 3000
If you need to decrease RE, enter your answer as a negative number; for instance: -3000
If you determine no change is needed to RE; enter 0
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Year
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Percentage of completion method $
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Completed contract method $
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2012
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600000
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387500
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2013
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545500
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322500
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2014
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537500
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385000
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2015
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512500
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395000
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2016
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685000
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415000
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Total
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2880500
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1905000
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Income for 2016
|
|
|
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Under completed contract method
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|
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Revenue
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$415000
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|
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Less 30% tax
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124500
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|
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Net income
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$290500
|
|
|
|
|
|
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Retained earnings
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|
|
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Total revenue under percentage of completion method until 2016
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$2880500
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Less 30% tax
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$864150
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Net balance
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$2016350
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$2016350
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|
|
|
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Under completed contract method revenue until 2016
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$1905000
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Less 30% tax
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$571500
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Net balance
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$1333500
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$133500
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Need to reduce from retained earnings
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-($682850)
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