Watson Co. is a specialty fabrics manufacturer and retailer whooperates mainly in the Carolinas. A partial trial balance showingWatson’s equity, revenue and expense balances as of its December31, 2019 year-end follows:

   Debits             Credits

Dividends                                                                    $   321,960

Retained earnings(1/1/19)                                                                  $   859,265

Unrealized holding loss – ECM bonds (1/1/19)                    53,710

Interestrevenue                                                                                   17,805

Salesrevenue                                                                                     9,147,540

Advertisingexpense                                                          116,385

Cost of goodssold                                                      5,947,660

Depreciation expense                                                      241,195

Interestexpense                                                              108,470

Salaries and wagesexpense                                          1,859,255

Utilitiesexpense                                                               212,090

In addition, the following information is available for thecompany for 2019. Unless indicated otherwise, this information hasnot yet been reflected in the company’s accounts. All of the dollaramounts are stated on a before-tax basis.

1. In early January 2016, Watson purchased certainequipment at a price of $81,750. Watson began depreciating theequipment using the straight-line method and estimates of 10 yearsfor useful life and $16,350 for salvage value. Watson depreciatedthe equipment on this basis through 2018 (actually 2019 – see theNote below). In early January 2019, the company determined that itsinitial estimates needed to be revised. Watson increased the usefullife from 10 to 15 years and decreased the salvage value from$16,390 to $5,250.

Note – Watson mistakenly computeddepreciation on this equipment for 2019 using the originalestimates (10 years and $16,350). The depreciation expense of$241,195 shown in the partial trial balance above reflects use ofthe original estimates for this equipment.

2. In March 2019, Watson extinguished bonds payable having a bookvalue of $429,350. Watson paid the investors $392,675 to retirethese bonds.

3. In November 2019, Watson discovered that it understated thesales revenue reported in its 2018 financial statements. As aresult, the company’s 2018 sales revenue was understated by$74,290. Watson plans to record the correcting entry beforeyear-end 2019 and report the correction as required by GAAP in its2019 financial statements.

Note – The discovery and correction ofthe 2018 error will not change the sales revenue for 2019. The$9,147,540 figure in the partial trial balance above iscorrect.

4. In preparing its 2019 financial statements, Watson hasdetermined that it must write down certain inventory items by atotal of $46,310.

5. In 2015, Watson purchased bonds issued by ECM Co., which itcontinues to hold as an available-for-sale investment. The fairvalue of Watson’s investment increased in 2019, from $283,415 to$369,185.

Note – The $53,710 Unrealized holdingloss – ECM bonds (1/1/19) in the partial trial balance aboverelates to this item and, of course, is stated net of incometaxes.

6. In September 2019, the government of South Africa expropriateda manufacturing facility that Watson owned in the country. TheSouth African government informed Watson that it does not intend tocompensate the company for this action. Watson’s accounts show abook value for the manufacturing plant at the time of expropriationof $239,850. This event satisfies the conditions of unusual andinfrequent.

7. At year-end 2019, Watson decided to change its inventory costflow method from First-in, First-out (FIFO) to Average Cost. Theeffect of the change on 2019 and prior years is as follows:

    2019           Prior Years

Cost of goods sold –FIFO                                $5,947,660       $14,732,000

Cost of goods sold – AverageCost                    6,081,390          15,316,000

Note – The cost of goods sold figurein Watson’s partial trial balance above reflects use of the oldmethod (FIFO) for 2019.

8. In April 2019, Watson shifted its business strategy, resultingin the August 2019 sale of a component of the company considered aseparate major line of business. The sale produced a loss ondisposal of $71,920. The operations of the component, prior to thesale in August, produced an income of $22,070.

Assume the above amounts are material. Also, assume the incometax rate applicable to all years and all income items is 30%.Finally, note that Watson uses the multiple-step format for thereporting of income items and the two-income statement approach forthe display of other comprehensive income items.

– Instructions –

Prepare the financial statements for the year ended December 31,2019 to show the proper reporting of Watson’s:

Prepare an Income statement and retained earnings statement fromthe informantion above.

Prepare these statements in good form,according to GAAP requirements.