Question

Presented below are the comparative income and retained earnings statements for Denise Habbe Inc. for the years 2017 and 2018.

2018 2017 Sales \(340,000 \)270,000 Cost of sales 200,000 142,000 Gross profit 140,000 128,000 Expenses 88,000 50,000 Net income \( 52,000 \) 78,000 Retained earnings (Jan. 1) \(125,000 \) 72,000 Net income 52,000 78,000 Dividends (30,000) (25,000) Retained earnings (Dec. 31) \(147,000 \)125,000

The following additional information is provided: 1. In 2018, Denise Habbe Inc. decided to switch its depreciation method from sum-of-the-years’ digits to the straight-line method. The assets were purchased at the beginning of 2017 for \(100,000 with an estimated useful life of 4 years and no salvage value. (The 2018 income statement contains depreciation expense of \)30,000 on the assets purchased at the beginning of 2017.) 2. In 2018, the company discovered that the ending inventory for 2017 was overstated by $24,000; ending inventory for 2018 is correctly stated.

Instructions Prepare the revised retained earnings statement for 2017 and 2018, assuming comparative statements. (Ignore income taxes.)

Short answer

The Closing balance of retained earnings for 2018 is $167,000 and for 2017 is $101,000.

Step-by-step solution

Comparative Income statement

	2018 ($)	2017 ($)
Sales	340,000	270,000
Cost of sales	176,000	166,000
Gross profit	164,000	104,000
Expenses	83,000	50,000
Income before cumulative effect of a Change	81,000	5,400
Cumulative effect on prior years	15,000
Net Income	96,000	54,000

Statement of retained earnings

Comparative retained earnings statement:

	2018 ($)	2017 ($)
Retained earnings, Jan 1	101,000	72,000
Net income	96,000	54,000
Dividends	-30,000	-25,000
Retained Earnings, Dec 31	167,000	101,000