Zephyr Corporation began operations on January 1, 2014. Recently the corporation has had several unusual accounting problems related to the presentation of its income statement for financial reporting purposes. The company follows ASPE.

You are the CPA for Zephyr and have been asked to examine the following data:

This additional information was also provided:
1. The controller mentioned that the corporation has had difficulty collecting certain receivables. For this reason, the bad debt accrual was increased from 1% to 2% of sales revenue. The controller estimates that, if this rate had been used in past periods, an additional $83,000 worth of expense would have been charged. The bad debt expense for the current period was calculated using the new rate and is part of selling and administrative expense.
2. There were 400,000 common shares outstanding at the end of 2017. No additional shares were purchased or sold in 2017.
3. The following items were not included in the income statement:
• Inventory in the amount of $112,000 was obsolete.
• The company announced plans to dispose of a recognized segment. For 2017, the segment had a loss, net of tax, of $162,000.
4. Retained earnings as at January 1, 2017, were $2.8 million. Cash dividends of $700,000 were paid in 2017.
5. In January 2017, Zephyr changed its method of accounting for plant assets from the straight-line method to the diminishing-balance method. The controller has prepared a schedule that shows what the depreciation expense would have been in previous periods if the diminishing-balance method had been used.

6. In 2017, Zephyr discovered that in 2016 it had failed to record $20,000 as an expense for sales commissions. The sales commissions for 2016 were included in the 2017 expenses.
Instructions
(a) Prepare the income statement for Zephyr Corporation. Do not prepare notes to the financial statements. The effective tax rate for past years was 30%.
(b) Prepare a combined statement of net income and retained earnings.
(c) From the perspective of the reader of the financial statements, what is the purpose of intraperiod tax allocation for the statements of income and retained earnings?

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ZEPHYR CORPORATION Income Statement For the Year Ended December 31, 2017 Sales revenue Cost of goods sold Gross profit Selling and administrative expense Income before income tax Income tax (30%) Net income $9,500,000 5,900,000 3,600,000 1,300,000 2,300,000 690,000 $1,610,000 Depreciation Expense under Straight-Line Depreciation Expense under Diminishing- BalanceDifference 2014 $ 75,000 $ 2015 2016 75,000 75,000 $225,000 150,000 112,500 5.000 37,500 84,375 $346,875 9,375 $121.875