Harris Co. is a niche furniture manufacturer and retailer who operates mostly in the southeastern U.S. A partial trial balance showing Harris’ equity, revenue and expense balances as of its December 31, 2021 year-end follows:

	Debits	Credits
Dividends	$   131,860
Retained earnings (1/1/21)		$1,079,435
Net unrealized loss on HKB bonds (1/1/21)	92,145
Interest revenue		18,090
Sales revenue		5,741,315
Bad debt expense	83,290
Cost of goods sold	3,326,570
Depreciation expense	178,610
Interest expense	62,930
Rent expense	139,450
Salaries and wages expense	1,429,285
Utilities expense	116,720

In addition, the following information is available for the company for 2021. Unless indicated otherwise, this information has not yet been reflected in the company’s accounts. All of the dollar amounts are stated on a before-tax basis.

1.         In 2019, Harris purchased certain equipment and began using it. In the process of preparing the adjusting entries at year-end 2021, Harris discovered that it mistakenly ignored the equipment’s estimated salvage value in the depreciation calculations for 2019 and 2020. The total amount of overstatement of depreciation expense for these two years was $19,260.

Note – The discovery and correction of the 2019 and 2020 errors will not change the depreciation expense for 2021. The $178,610 figure in the partial trial balance above is correct.

2.         At year-end 2021, Harris is reviewing the percentage it uses to estimate bad debts. With economic conditions improving in 2021, the company determines that it must decrease the percentage it uses to estimate bad debts from 8.55% to 6.30%. The effect of this change on 2021 income is as follows:

Bad debt expense based on an 8.55% rate (old rate)	$83,290
Bad debt expense based on a 6.30% rate (new rate)	66,070

Note – The bad debt expense figure in the partial trial balance above reflects use of the old rate (8.55%) for 2021.

3.         In preparing its 2021 financial statements, Harris has determined that it must write off $101,820 of its recorded goodwill.

4.         In 2018, Harris purchased bonds issued by HKB Co., which it continues to hold as an available-for-sale investment. The fair value of Harris’ investment increased in 2021, from $761,230 to $809,615.

Note – The $92,145 Net unrealized loss on HKB bonds (1/1/21) in the partial trial balance above relates to this item and, of course, is stated net of income taxes.

5.         In February 2021, Harris sold land it was holding as an investment. Harris received $294,530 from the sale of the land. At the time of the sale, the land had a book value of $141,785.

6.         In June 2021, Harris shifted its business strategy, resulting in the August 2021 sale of a component of the company considered a separate major line of business. The sale produced a gain on disposal of $162,950. The operations of the component, prior to the sale in July, produced a loss of $57,480.

7.         In November 2021, Harris extinguished 7% bonds payable having a book value of $458,035. Harris paid the investors $496,140 to retire these bonds.

8.         At year-end 2021, Harris decided to change its inventory cost flow method from Last-in, First-out (LIFO) to First-in, First-out (FIFO). The effect of the change on 2021 and prior years is as follows:

	2021	Prior Years
Cost of goods sold – LIFO	$3,326,570	$8,724,000
Cost of goods sold – FIFO	3,087,655	8,609,000

Note – The cost of goods sold figure in Harris’ partial trial balance above reflects use of the old method (LIFO) for 2021.

Assume the above amounts are material. Also, assume the income tax rate applicable to all years and all income items is 30%. Finally, note that Harris uses the multiple-step format for the reporting of net income items and the two-income statementapproach for the display of other comprehensive income items.

– Instructions –

Prepare the financial statements for the year ended December 31, 2021 to show the proper reporting of Harris’:

(a)        income and <12.0>

(b)        changes in retained earnings. <3.0>

□          Round all dollar amounts you present in your financial statements to the nearest dollar.

Answer rating: 100% (QA)

a Income and comprehensive income Income Statement Revenues Interest revenue 18090 Sales revenue 5741315 Total revenues 5759405 Expenses Cost of goods ... View the full answer