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Exercise 22-9

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

2018 2017 Sales $365,000 $266,000 Cost of sales 218,000 146,000 Gross profit 147,000 120,000 Expenses 89,100 48,400 Net income $57,900 $71,600 Retained earnings (Jan. 1) $120,300 $72,700 Net income 57,900 71,600 Dividends (27,700 ) (24,000 ) Retained earnings (Dec. 31) $150,500 $120,300

The following additional information is provided:

1. In 2018, Novak 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 $100,500 with an estimated useful life of 4 years and no salvage value. (The 2018 income statement contains depreciation expense of $30,150 on the assets purchased at the beginning of 2017.) 2. In 2018, the company discovered that the ending inventory for 2017 was overstated by $26,000; ending inventory for 2018 is correctly stated.

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

NOVAK INC. Retained Earnings Statement For the Year Ended 2018 2017 Correction of Error for Inventory Overstatement Dividends Net Income Retained Earnings, January 1, adjusted Retained Earnings, January 1, unadjusted Retained Earnings, December 31 $ Add Less : Correction of Error for Inventory Overstatement Dividends Net Income Retained Earnings, January 1, adjusted Retained Earnings, January 1, unadjusted Retained Earnings, December 31 Correction of Error for Inventory Overstatement Dividends Net Income Retained Earnings, January 1, adjusted Retained Earnings, January 1, unadjusted Retained Earnings, December 31 Add Less : Correction of Error for Inventory Overstatement Dividends Net Income Retained Earnings, January 1, adjusted Retained Earnings, January 1, unadjusted Retained Earnings, December 31 Add Less : Correction of Error for Inventory Overstatement Dividends Net Income Retained Earnings, January 1, adjusted Retained Earnings, January 1, unadjusted Retained Earnings, December 31 Correction of Error for Inventory Overstatement Dividends Net Income Retained Earnings, January 1, adjusted Retained Earnings, January 1, unadjusted Retained Earnings, December 31 $ $

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