EXERCISE 22-1 (10–15 minutes)

(a) The net income to be reported in 2015, using the retrospective

approach, would be computed as follows:
Income before income tax $700,000
Income tax (35% X $700,000) 245,000
Net income $455,000

(b) Construction in Process........................................ 190,000

Deferred Tax Liability ($190,000 X 35%).........
66,500
Retained Earnings..........................................
123,500*

*($190,000 X 65% = $123,500)

EXERCISE 22-13 (10–15 minutes)

(a) The net income to be reported in 2015, using the retrospective

approach, would be computed as follows:
Income before income tax $900,000
Income tax (40% X $900,000) 360,000
Net income $540,000

(b) Construction in Process........................................ 290,000

Deferred Tax Liability (40% X $290,000).......
116,000
Retained Earnings..........................................
174,000*

*($290,000 X 60% = $174,000)

EXERCISE 22-19 (20–25 minutes)

(a) 1. Supplies Expense ($2,700 – $1,100)................... 1,600

Supplies........................................................ 1,600

2. Salary and Wages Expense................................ 2,900

($4,400 – $1,500)
Salaries and Wages Payable....................... 2,900
 3. Interest Revenue ($5,100 – $4,350)..................... 750
Interest Receivable on Investments........... 750

4. Insurance Expense.............................................. 25,000

($90,000 – $65,000)
Prepaid Insurance........................................
25,000

5. Rent Revenue ($28,000 ÷ 2)................................ 14,000

Unearned Rent Revenue..............................
14,000

6. Depreciation Expense......................................... 45,000

($50,000 – $5,000)
Accumulated Depreciation..........................
45,000

7. Retained Earnings............................................... 7,200

Accumulated Depreciation..........................
7,200

(b) 1. Retained Earnings............................................... 1,600

Supplies........................................................
1,600

2. Retained Earnings............................................... 2,900

Salaries and Wages Payable.......................
2,900

3. Retained Earnings............................................... 750

Interest Receivable......................................
750

4. Retained Earnings............................................... 25,000

Prepaid Insurance........................................
25,000

5. Retained Earnings............................................... 14,000

Unearned Rent Revenue..............................
14,000

6. Retained Earnings............................................... 45,000

 Accumulated Depreciation..........................
45,000

7. Same as in (a).

(c) 6. Retained Earnings............................................... 27,000

Income Taxes Receivable................................... 18,000*
Accumulated Depreciation..........................
45,000
*($45,000  40%) – less tax expense.

7. Retained Earnings............................................... 4,320

Income Taxes Receivable................................... 2,880**
Accumulated Depreciation.......................... 7,200
**($7,200  40%) – less tax expense.

PROBLEM 22-1

(a) 1. Cost of equipment............................................................ $85,000

Less: Salvage value......................................................... 5,000
Depreciable cost.............................................................. $80,000

Depreciation to 2014
2011 ($80,000/10).......................... $ 8,000
2012 ($80,000/10).......................... 8,000
2013 ($80,000/10).......................... 8,000
$24,000

Depreciation in 2014
Cost of equipment....................... $85,000
Less: Depreciation to 2014........ 24,000
Book value (January 1, 2014)...... 61,000
Less: Salvage value.................... 3,000
Depreciable cost.......................... $58,000

Depreciation in 2014
$58,000/4 = $14,500

Depreciation Expense............................................. 14,500

 Accumulated Depreciation—Equipment........
14,500

2. Cost of Building.................................... $300,000

Less: Depreciation to 2014
2012............................................ 60,000
2013............................................ 48,000
Book value (January 1, 2014)... $192,000
Less: Salvage value................. 30,000
Depreciable cost........................ $162,000

Depreciation in 2014
($162,000/8) = $20,250

Depreciation Expense............................................. 20,250

Accumulated Depreciation—Buildings.........
20,250
PROBLEM 22-1 (Continued)

3. Depreciation Expense ($120,000 – $16,000) ÷ 8...... 13,000

Accumulated Depreciation—Machinery..........
13,000

Accumulated Depreciation—Machinery.................. 3,000

Retained Earnings.............................................
3,000

Depreciation recorded in 2012:

1
($120,000 ÷ 8) X 2 = 7,500
Depreciation that should be recorded in 2012:
1
([$120,000 – $16,000] ÷ 8) X 2 = 6,500
Depreciation recorded in 2013:
(120,000 ÷ 8) = $15,000
Depreciation that should be recorded in 2013:
(120,000 – $16,000) ÷ 8 = 13,000

Depreciation Depreciation that

taken       should be taken   Differences
2012 $7,500 $6,500 $1,000
2013 15,000 13,000 2,000
22,500 19,500 $3,000

(b) HOLTZMAN COMPANY

Comparative Income Statements
For the Years 2014 and 2013

     2014         2013   
Income before depreciation expense.................... $300,000 $310,000
Depreciation expense*............................................ 47,750 69,000
Net income............................................................... $252,250 $241,000
*Depreciation Expense     2014          2013   
Equipment......................................................... $ 14,500 $ 8,000
Buildings........................................................... 20,250 48,000
Machinery.......................................................... 13,000 13,000
$ 47,750 $ 69,000