After going through this assignment, the students should be able to: 1.

Prepare and present Income Statement in the standardized format; 2. Present the effect of changes in accounting policy in the statement of retained earnings; & 3. Present the effect of correction of errors in the statement of retained earnings.

Ambler Diversification Limited (ADL) has a diversified line of business. The owner of the company, Mr. Ibad Ahmad, is a young and enthusiastic person and is always willing to invest in diverse projects to capitalize good amount of earnings. ADL has two major separate lines of businesses - beverages and financial services. At the beginning of 2011, Mr. Ibad decided to invest in pharmaceutical industry. For financing this investment, he sold its financial services unit in whole which resulted in Rs.1,400,000 pretax gains. He also sold an assembly plant installed in the beverages unit at pretax loss of Rs.1,700,000. This sale did not represent the sale of ADLs beverages unit. The following additional transactions and events pertain to 2011 are as follows: Sales Rs.17,000,000; Cost of Goods Sold Rs.5,700,000; Selling Expenses Rs.4, 000,000 and General & Administrative Expenses are of Rs.2,600,000. The companys income tax rate is 30%. The company incurred Rs.350, 000 clean-up cost (pretax) associated with an accidental release of potentially hazardous chemicals. The company has very strong controls to prevent such events, and this occurred only because of a series of nonrecurring and unusual system failures. The loss has been judged to be extraordinary. ADL changed its method of accounting for inventory at the beginning of 2011. The cost of goods sold of Rs.5,700,000 is based on the new method. Had the new method been in use all along previously, prior years income would have been higher by Rs. 4, 800,000 (net of tax effects). The companys senior accountant discovered an error in a prior years reported profit. The error caused an overstatement of Rs.745,000 for net income of year 2010. Retained earnings as at January 1, 2011, were showing balance of Rs.11,000,000 before giving consideration to the correction of error and accounting change described above.

Requirement: a) Prepare an income statement for Ambler Diversification Limited for the year 2011. b) Prepare a statement of retained earnings after incorporating the above mentioned corrections and change estimates for the year 2011.

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