Question

Blue Eagle 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 Blue Eagle and have been asked to examine the following data:

BLUE EAGLE CORPORATION Income Statement For the Year Ended December 31, 2017
	Sales		$9,500,000
	Cost of goods sold		5,900,000
	Gross profit		3,600,000
	Selling and administrative expense		1,300,000
	Income before income tax		2,300,000
	Income tax expense (40%)		920,000
	Net income		$1,380,000

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 $83,300 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 $115,000 was obsolete. ● The company announced plans to dispose of a recognized segment. For 2017, the segment had a loss, net of tax, of $166,000.
4.		Retained earnings as at January 1, 2017, were $3.2 million. Cash dividends of $600,000 were paid in 2017.
5.		In January 2017, Blue Eagle 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. Depreciation Expense under Straight-Line Depreciation Expense under Diminishing-Balance Difference 2014 $80,000 $160,000 $80,000 2015 80,000 120,000 40,000 2016 80,000 90,000 10,000 $240,000 $370,000 $130,000
6.		In 2017, Blue Eagle discovered that in 2016 it had failed to record $10,000 as an expense for sales commissions. The sales commissions for 2016 were included in the 2017 expenses.

Prepare the income statement for Blue Eagle Corporation. The effective tax rate for past years was 40%. (Hint: a change in depreciation method is considered a change in estimate, not a change in accounting policy.)

Answer 1

Sales	9600000
Less	Cost of goods sold	5960000
Less	Obsolete Inventory	112000
	Gross Profit	3528000
	Selling & Administrative expense	1314000
	Retrospective Depreciation effect	120250
	Income before Income Tax	2093750
Less	Income tax @ 40%	837500
	Total Income	1256250
	Net Loss from discoutinuing operation	160000
	Net Income from continuing operations	1096250
Remark :-
1)	New rate of bad debt allowance is already charged in Financial Statements. No allowance would be made for retrspective effect for bad debts, as per Accounting Standards.
2)	Co. has changed the accounting policy for charging depreciation from straight line to WDV from retrospective effect.
3)	Charging sales commission expense for 2013 in 2014 is prior period expense. Same is correct in light of prevailing Accounting Standards but disclosure to the effect must be given in Financial statements.