ABC Inc. sold a component of their business to XYZ Inc.

1. On March 1, 2010, ABC Inc. sold a component of their business to XYZ Inc. for $700,000. ABC determined the component would be discontinued in 2009 and properly reported the component in the discontinued operations section of the income statement. At 12/31/2009, ABC estimated the fair value less cost to sell of the component to be $725,000, while the book value was $775,000.

During 2010, ABC had a pre-tax operating loss of $60,000 for the component. ABC is subject to a 30% income tax rate. Use () to show a loss.

1) Determine the net income/(loss) on operations from the discontinued component as of December 31, 2010: $

2) Determine the net gain/loss on disposal from the discontinued component as of December 31, 2010: $

2. ABC Inc. began operations on January 1, 2006. During its first 3 years of operations, ABC reported net income and declared dividends as follows.

Net Income Dividends

2006 $ 50,000 $ 0

2007 75,000 10,000

2008 125,000 0

2009 150,000 50,000

The following information relates to 2010.

• Net income was originally calculated as $200,000 and no dividends were declared during the period.

• Assume ABC is charged a tax rate of 30%.

• Additionally, ABC discovered in 2010 that they understated depreciation expense in 2008 by $25,000 and understated 2009 depreciation expense by $20,000.

• At the end of 2010, after the net income above was determined ABC decided to change from FIFO to LIFO. The following COGS information was determined under each method. The net income number given above was calculated for 2010 using FIFO.

FIFO COGS LIFO COGS

2006 $135,000 $120,000

2007 $115,000 $130,000

2008 $140,000 $110,000

2009 $150,000 $100,000

2010 $145,000 $115,000

ABC reported two years on the face of the income statement during 2010. Using the information given complete the 2009 and 2010 Statements of Retained Earnings as reported in the 2010 Annual Report. Use a parenthesis to indicate a negative balance (or subtraction).

2010 Annual Report

Retained Earnings Statements 2009 and 2010

Beginning Retained Earnings, 1/1/2009 $

Cumulative Effect due to a Change in Accounting Principle $

Prior Period Adjustment $

2009 Net Income $

Dividends $

Ending Retained Earnings $

Beginning Retained Earnings, 1/1/2010 $

Cumulative Effect due to a Change in Accounting Principle $

Prior Period Adjustment $

2010 Net Income $

Dividends $

Ending Retained Earnings $