A combined statement of income and retained earnings for DC 5 Ltd. for the year ended December 31, 2020, follows. (As a private company, DC 5 has elected to follow ASPE.) Also presented are three unrelated situations involving accounting changes and the classification of certain items as ordinary or unusual. Each situation is based on the combined statement of income and retained earnings of DC 5 Ltd.

                                                      DC 5 Ltd.
               Combined Statement of Income and Retained Earnings
                              For the Year Ended December 31, 2020
Sales revenue ................................................................................ $7,300,000
Cost of goods sold .......................................................................... 3,700,000
Gross profit ...................................................................................... 3,600,000
Selling, general, and administrative expenses ............................ 2,300,000
Income before income tax ............................................................. 1,300,000
Income tax expense .......................................................................... 390,000
Income before unusual item ............................................................ 910,000
Loss from tornado (net of taxes) ...................................................... 630,000
Net income ......................................................................................... 280,000
Retained earnings, January 1 ......................................................... 1,250,000
Retained earnings, December 31 ............................................... $1,530,000

Situation 1. In late 2020, the company discontinued its apparel fabric division. The loss on the disposal of this discontinued division amounted to $790,000. This amount was included as part of selling, general, and administrative expenses. Before its disposal, the division reported the following for 2020: sales revenue of $1.5 million; cost of goods sold of $750,000; and selling, general, and administrative expenses of $580,000.

Situation 2. At the end of 2020, the company’s management decided that the estimated loss rate on uncollectible accounts receivable was too low. The loss rate used for the years 2019 and 2020 was 1.2% of total sales revenue, and owing to an increase in the write off of uncollectible accounts, the rate was raised to 2.6% of total sales revenue. The amount recorded in Bad Debt Expense under the heading Selling, General, and Administrative Expenses for 2020 was $87,600 and for 2019 it was $95,700.

Situation 3. On January 1, 2018, the company acquired machinery at a cost of $640,000. The company adopted the declining-balance method of depreciation at a rate of 30% for this machinery, and had been recording depreciation over an estimated life of 10 years, with no residual value. At the beginning of 2020, a decision was made to adopt the straight-line method of depreciation for this machinery to better match expenses to their related revenues. Depreciation for 2020, based on the straight-line method, was included in selling, general, and administrative expenses. (Hint: A change in depreciation method is considered a change in estimate, not a change in accounting policy.)

Instructions

For each of the three unrelated situations, prepare a revised combined statement of income and retained earnings for DC 5 Ltd. The company has a 30% income tax rate.