Xiaoxiao Xia
Rebekah Titsworth
Dan Brendich
Kai Benjamin
Melissa Goetz

Retained Earnings Statement,
Prior Period Adjustment, for the year 2010 for Acadian Corp.
Retained earnings, January 1,2010
Add:
Gain on sale of investments(net of tax)
Net income
Refund on litigation with government,
(related to the year 2007, net of tax)
Recognition of income earned in 2009,
41,200
84,500
21,600 but omitted from income statement in that year (net of tax)
25,400
Deduct:
Loss on discontinued operations(net of tax)
Write-off of goodwill(net of tax)
35,000
60,000
23,200 Cumulative effect on income of prior years in changing from
LIFO to FIFO inventory valuation in 2010(net of tax)
Cash dividends declared
Retained earnings, December 31,2010
32,000
257,600
172,700
430,300
150,200
280,100

？ Are all information useful to prepare a corrected retained earnings statement?
？ Which ones should be considered and which ones not?
Why?
？ Where the ones that do not appear in corrected retained earnings statement should be shown?
Unusual Gain or loss
Discontinued operations
Extraordinary items
Good will

Acdain Corp.
Retained Earnings Statement
For the year ended December 31, 2010
Retained Earnings, Jan 1, as reported $257,600
$25,400 Correction for understatement of net income in prior period
(Correction error)
Correction for overstatement of net income in prior period
(Change in accounting principle)
Retained Earnings, Jan 1, as adjusted
Add:
Less:
Net Income
(Changes in Income
Statement)
Cash dividends
Retained Earnings, December 31
$32,000
($23,200)
$259,800
$52,300
$280,100

Income from Continuing Operations XXX
-
+ Gain on Sale of Investments ($41,200)
Loss on Discontinued Operations ($35,000)
-
+ Refund on litigation with the government
($21,600)
Write off of Goodwill ($60,000)
= Net effect on income of -$32,200
Net Income as of 12/31/2010 is $52,300 and should be reported as such on corrected Retained
Earnings Statement

 Unusual or infrequent but
NOT both
 Questions to consider…
 What is the business environment?
 What is the business’ primary operation?

Net Sales
COGS
Gross Profit
Selling, General, and Administrative Expenses
Income from Operations
Other Revenues and Gains
Unusual Gain from sale of investments
Other Expenses and Losses
Income before income tax
Income Tax
Net Income for the year

 Discontinued operations occur when:
–
A company eliminates operations and cash flows of a component from ongoing operations
– There is no significant continuing involvement in the component after its disposal
 The effects of discontinued operations net of tax are shown as a separate category, after continuing operations but before extraordinary items

 Loss on discontinued operations (net of tax) $35,000
–
Not present in the corrected retained earnings statement
– Shown net of taxes in separate section of income statement
–
Deducted from net income in income statement after
“Income from continuing operations” but before extraordinary items

–
Nonrecurring material items that significantly differ from a typical business activities
– Both unusual and infrequent , considering the environment in which the company operates
– Extraordinary items must be shown net of taxes in a separate section in the income statement, usually just before net income .


Refund on litigation with government, related to the year
2007 (net of tax) $21,600
– Whilst we may be tempted to show this item as an extraordinary gain, we realize that it does not actually satisfy the criteria previously mentioned
– The word “refund” suggests that the litigation may be of a matter relating to taxes- an activity which is neither infrequent nor unusual
– As a result, this item would be listed in the Income Statement under the heading of Other Revenues and Gains

Litigation refund
(net of tax) 21, 600 xxx

• The write off in goodwill represents a reduction of the intangible asset
• However, the write off also represents a loss which must be shown on the current year’s Income Statement
• It would be classified under the heading of Other Expenses and Losses as it’s effect is a reduction in Net Income.



Goodwill write off (60000)
Income before Income tax xxx

Acdain Corp.
Retained Earnings Statement
For the year ended December 31, 2010
Retained Earnings, Jan 1, as reported
Correction for understatement of net income in prior period
(Correction error)
Correction for overstatement of net income in prior period
(Change in accounting principle)
Retained Earnings, Jan 1, as adjusted
Add:
Less:
Net Income
(Changes in Income
Statement)
Cash dividends
Retained Earnings, December 31
$32,000
$257,600
$25,400
($23,200)
$259,800
$52,300
$280,100

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