Question

Maher Inc. reported the following data for 2020:

Net income	$   442,000	Retained earnings, January 1	104,000
Dividends	120,000	Income tax rate for all years	20%

Additional information for 2020 are as follows.

1.	A machine originally purchased at the beginning of 2019 for $54,000 was depreciated on a straight-line basis with a salvage value of $9,000 and a useful life of 6 years. In 2020, the company extended the useful life to a total of ten years. Depreciation for 2020 was recorded using the new useful life.
2.	The corporation changed its method of inventory costing from weighted average cost to the FIFO method in 2020. The effect of this change increased 2018 pretax income by $40,000 and increased 2019 pretax income by $20,000. The FIFO method was used for 2020.

Instructions: Prepare a statement of retained earnings.

Answer 1

Retained earnings are income that a company has generated during its history and kept rather than paying dividends

Retained Earnings = Beginning Period Retained Earnings + Net Income (or Loss) – Cash Dividends – Stock Dividends

Dividends are treated as a debit, or reduction, whether or not they’re paid out.

In the question is says that the new useful life is used ti record the transaction for the year 2020 and hence there is no treatment required as correct useful life was taken while recording the transaction.

Treatment for change in method of inventory valuation.in income

Net Income given 442,000

Add:
Income tax deducted 110,500 (442,000 x 100/80)

552,500

Add:

Increase in pretax income of 2018 40,000

Increase in pretax income of 2019 20,000

612,500

Less: Income Tax at 20%    122,500

  490,000

Statenment of Retained Earnings

Beginning Period Retained Earnings 104,000

Add:

Net Income (or Loss) 490,000

Less:

Dividends 120,000

Retained Earnings at the end 474,000