XYZ Company's net incomes for the past three years are presented below:
2009 2008 2007
$480,000 $450,000 $360,000
During the 2009 year-end audit, the following items come to your attention:
1. XYZ bought a truck on January 1, 2006 for $196,000 with a $16,000 estimated salvage value and a six-year life. The company debited an expense account and credited cash on the purchase date for the entire cost of the asset. (Straight-line method)
2. During 2009, XYZ changed from the straight-line method of depreciating its cement plant to the double-declining balance method. The following computations present depreciation on both bases:
2009 2008 2007
Straight-line 36,000 36,000 36,000
Double-declining 46,080 57,600 72,000
The net income for 2009 was computed using the double-declining balance method, on the January 1, 2009 book value, over the useful life remaining at that time. The depreciation recorded in 2009 was $72,000.
3. XYZ, in reviewing its provision for uncollectibles during 2009, has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2008 and 2009 when the expense had been $18,000 and $12,000, respectively. The company recorded bad debt expense under the new rate for 2009. The company would have recorded $6,000 less of bad debt expense on December 31, 2009 under the old rate.
(a) Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year.
(b) Compute the net income to be reported each year 2007 through 2009.
(c) Assume that the beginning retained earnings balance (unadjusted) for 2007 was $1,260,000. At what adjusted amount should this beginning retained earnings balance for 2007 be stated, assuming that comparative financial statements were prepared?
(d) Assume that the beginning retained earnings balance (unadjusted) for 2009 is $1,800,000 and that non-comparative financial statements are prepared. At what adjusted amount should this beginning retained earnings balance be stated?