Thompson Company is in the process of closing its books at the end of 2020. The company’s preliminary income statement for 2020 and its reported income statement for 2019 are given below.
Cost of Goods Sold
Thompson’s records reveal the following information:
After preparing the preliminary financial statements, Thompson decided to change the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2018. It has a 10-year useful life and no salvage value.
After preparing the preliminary financial statements, Thompson discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows.
December 31, 2018
December 31, 2019
December 31, 2020
Thompson purchased equipment on January 3, 2016. It originally cost $180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero residual value. In 2020, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at $3,000, but the preliminary financial statements were prepared using the old estimate.
Thompson purchased a $36,000 insurance policy on July 1, 2018, that expires on June 30, 2022. When the preliminary financial statements were reviewed, it was discovered that the original payment had been charged to insurance expense.
A. Prepare the necessary journal entries at December 31, 2020, to record the above information.
B. Prepare new comparative income statements to reflect the adjustments required (1) through (4) above. You may ignore income taxes.
C. Retained earnings reported for the end of 2019 was $2,067,950 and at the end of 2018 was $1,876,000. Dividends of $100,000 were declared in each year. Prepare comparative statements of retained earnings for Thompson Company for 2020 and 2019, reflecting appropriate adjustments from items (1)-(4) above, ignoring income taxes.
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