Faices Company Inc. sells computing equipment and also provides consulting service. Its net incomes for the past
Question:
Faices Company Inc. sells computing equipment and also provides consulting service. Its net incomes for the past three years are presented below. Faices has NOT closed its 2020 accounting books.
| 2018 | 2019 | 2020 |
Net Income | $430,000 | $550,000 | $620,000 |
The following accounting changes and/or errors are noted for Faices in 2020.
- Faices has accounted for its long-term consulting contracts using the completed contract method prior to 2020. In 2020, it changed to the percentage-of-completion method. The following shows the differences of net income under the two methods for Faices's long-term consulting contracts in the prior years. Faices has reported its net income under the percentage of completion contract method (the new method) in 2020.
| 2018 | 2019 |
Percentage of completion (new method) | $250,000 | $107,000 |
Completed contract (old method) | $90,000 | $180,000 |
Differences | 160,000 | (73,000) |
B. In reviewing its warranty policy on equipment, Faices decided to change its estimates on warranty repairs. In prior years, Faices estimated 2% of its total sales would be returned for warranty repairs. As a result, the company has recorded warranty expense and estimated warranty liabilities of $90,000 under the old 2% estimate in 2020. In the review, Faices has determined that 3% of total sales is a more appropriate estimate for warranty expense. Under the new 3% estimate, the company would have recorded $31,000 more warranty expense and estimated warrant liabilities than that under the old 2% in 2020.
C. Faices found that it failed to record prepaid insurance expense of $28,500 in 2018, which understated its insurance expense and overstated its prepaid insurance expense by $28,500 in 2018.
Instructions
1. Considering the effects of the above items, restate the company’s income statements for 2018-2020 by completing the following table. Ignore taxes.
| Comparative Income Statements | ||
| 2018 | 2019 | 2020 |
Net Income (unadjusted) | 430,000 | 550,000 | 620,000 |
Adjustments |
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Net Income (adjusted) |
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2. Considering the effects of the above items, report any cumulative effects on Faices's beginning retained earnings balance. Specifically, Faices reported unadjusted retained earnings of $1,260,000 at January 1, 2020. (1) calculate the adjusted retained earnings at January 1, 2020. (2) During 2019, Faices's paid $100,000 cash dividend. Calculate Faices's retained earnings at the end of 2020. Ignore taxes. Show the calculation for any partial credits.
Understanding financial statements
ISBN: 978-0136086246
9th Edition
Authors: Lyn M. Fraser, Aileen Ormiston