One of the following is an example of managing earnings down (reducing earnings)?
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Solution :
A. Kenseth Company
Income Statement (for the year ended)
2017 2016
Sales 3000 3000
Cost of goods sold 1100 940
Operating expenses 1000 1000
Income before profit sharing 9000 1060
Profit sharing expense 96 100
Net Income $ 804 $ 960
The company must report as profit sharing expense in 2016, even though, profit sharing of expense may be
if FIFO had been used in the year 2016.
B. The profit sharing of expense reflects the indirect effect of the change in an accounting principle. Under the SFAS No. 154, the indirect effects from period before the change are recorded in the year of the change.
In this case, profit sharing expense recorded in the year 2007 is composed of :
$ 900 x 10% = $ 90 (year 2017 under the FIFO)
$ 60 x 10% = $ 6 (difference in the profit sharing for the year 2016)
Net = $ 96 (profit sharing expense for the FIFO in year 2017)
C. Retaining earnings statement of 2017
Retained earning, Jan 1 as reported $ 8000
Cumulative effect of the change to ($960 - $900) $ 60
Retained earnings , Jan 1, as adjusted $ 8060
Add Net income
Deduct Dividends $ 500
Retained earnings, Dec 31 $ 8364