Retained Earnings Statement, Prior Period Adjustment ---P4-6

Xiaoxiao XiaRebekah Titsworth

Dan BrendichKai BenjaminMelissa Goetz

Retained Earnings Statement, Prior Period Adjustment, for the year 2010 for Acadian Corp.

Retained earnings, January 1,2010 　 　 　 257,600

Add: 　　 Gain on sale of investments(net of tax) 41,200　　 Net income 84,500　　 Refund on litigation with government, 21,600　　 (related to the year 2007, net of tax) 　　 Recognition of income earned in 2009, 25,400 172,700

　 but omitted from income statement in that year (net of tax) 430,300

Deduct: 　　 Loss on discontinued operations(net of tax) 35,000　　 Write-off of goodwill(net of tax) 60,000　

　 Cumulative effect on income of prior years in changing from 23,200　

　 LIFO to FIFO inventory valuation in 2010(net of tax)

　 Cash dividends declared 32,000 150,200

Retained earnings, December 31,2010 　 　 　 280,100

Thinking…

？ Are all information useful to prepare a corrected retained earnings statement?

？ Which ones should be considered and which ones not? Why?

？ Where the ones that do not appear in corrected retained earnings statement should be shown?

Unusual Gain or loss

Discontinued operations

Extraordinary items

Good will

Corrected Retained EarningsAcdain Corp.

Retained Earnings Statement

For the year ended December 31, 2010

Retained Earnings, Jan 1, as reported $257,600

Correction for understatement of net income in prior period $25,400

　 (Correction error) 　

Correction for overstatement of net income in prior period ($23,200)

　 (Change in accounting principle) 　Retained Earnings, Jan 1, as adjusted $259,800

Add: Net Income (Changes in Income Statement)

$52,300

Less: Cash dividends $32,000 　Retained Earnings, December 31 　 $280,100

Impact on Income Statement

Income from Continuing Operations XXX+ Gain on Sale of Investments ($41,200)- Loss on Discontinued Operations ($35,000)+ Refund on litigation with the government ($21,600)- Write off of Goodwill ($60,000)= Net effect on income of -$32,200

Net Income as of 12/31/2010 is $52,300 and should be reported as such on corrected Retained Earnings Statement

Unusual Gain/ Loss

Unusual or infrequent but NOT both

Questions to consider…

What is the business environment?

What is the business’ primary operation?

Impact on Income StatementNet SalesCOGSGross ProfitSelling, General, and Administrative ExpensesIncome from OperationsOther Revenues and GainsUnusual Gain from sale of investmentsOther Expenses and LossesIncome before income taxIncome TaxNet Income for the year

Discontinued Operations

Discontinued operations occur when:

– A company eliminates operations and cash flows of a component from ongoing operations

– There is no significant continuing involvement in the component after its disposal

The effects of discontinued operations net of tax are shown as a separate category, after continuing operations but before extraordinary items.

Discontinued Operations (cont.)

Loss on discontinued operations (net of tax) $35,000

– Not present in the corrected retained earnings statement

– Shown net of taxes in separate section of income

statement

– Deducted from net income in income statement after

“Income from continuing operations” but before

extraordinary items

Extraordinary Items

– Nonrecurring material items that significantly differ from a typical business activities

– Both unusual and infrequent, considering the environment in which the company operates

– Extraordinary items must be shown net of taxes in a separate section in the income statement, usually just before net income.

P4-6

Refund on litigation with government, related to the year 2007 (net of tax) $21,600– Whilst we may be tempted to show this item as an extraordinary

gain, we realize that it does not actually satisfy the criteria previously mentioned

– The word “refund” suggests that the litigation may be of a matter relating to taxes- an activity which is neither infrequent nor unusual

– As a result, this item would be listed in the Income Statement under the heading of Other Revenues and Gains

P4-6 (cont.)

Other Revenues and GainsLitigation refund

(net of tax) 21, 600

xxx

Other Expenses and Losses

Goodwill

• The write off in goodwill represents a reduction of the intangible asset

• However, the write off also represents a loss which must be shown on the current year’s Income Statement

• It would be classified under the heading of Other Expenses and Losses as it’s effect is a reduction in Net Income.

Goodwill write off (cont.)

The write off of goodwill will be shown on the Income Statement as follows:

Other Expenses and Losses:Goodwill write off (60000)

Income before Income tax xxx

Goodwill example on balance sheet

ConclusionAcdain Corp.

Retained Earnings Statement

For the year ended December 31, 2010

Retained Earnings, Jan 1, as reported $257,600

Correction for understatement of net income in prior period $25,400

　 (Correction error) 　

Correction for overstatement of net income in prior period ($23,200)

　 (Change in accounting principle) 　Retained Earnings, Jan 1, as adjusted $259,800

Add: Net Income(Changes in Income Statement)

$52,300

Less: Cash dividends $32,000 　Retained Earnings, December 31 　 $280,100

Thank you！

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