(a)



(a) DENISE HABBE INC.

Comparative Income Statements

For the Years 2008 and 22007

| |2008 |22007 |

|Sales |$340,000 |$270,000 |

|Cost of sales | 176,000* | 166,000** |

|Gross profit |164,000 |104,000 |

|Expenses | 83,000*** | 50,000 |

|Income before cumulative effect of a change in accounting principle | | |

| |81,000 |54,000 |

|Cumulative effect on prior years of retro-active application of new depreciation method | | |

| | | |

| |15,000 | |

|Net income |$ 96,000 |$ 54,000 |

***$200,000 – $24,000

***$142,000 + $24,000

***$88,000 – ($30,000 – $25,000)

DENISE HABBE INC.

Statement of Retained Earnings

For the Years 2008 and 22007

| |2008 |22007 |

|Retained earnings (January 1) |$101,000 |$ 72,000 |

|Net income |96,000 |54,000 |

|Dividends |(30,000) |(25,000) |

|Retained earnings (December 31) |$167,000 |$101,000 |

|(b) |DENISE HABBE INC. Income Statement |DENISE HABBE INC. Statement of Retained Earnings For the |

| |For the Year 2008 |Year 2008 |

| |Sales |$340,000 |Retained earnings (January 1) | |

| | | | |$125,000 |

| |Cost of sales | 176,000 |Prior period adjustment— inventory correction | |

| | | | | |

| | | | |(24,000) |

| |Gross profit |164,000 | | |

| |Expenses |83,000 | | |

| |Income before cumu-lative effect of a change in | |Retained earnings adjusted | |

| |accounting principle | | |101,000 |

| | |81,000 | | |

| | | |Net income |96,000 |

| |Cumulative effect on prior years of retro-active | |Dividends | (30,000) |

| |application of new depreciation method | | | |

| | | | | |

| | | | | |

| | |15,000 | | |

| | | |Retained earnings (December 31) | |

| | | | |$167,000 |

| |Net income |$ 96,000 | | |

Calculations and explanations:

1.22007 cost of sales increased $24,000; 2008 cost of sales decreased $24,000.

2.22007 expenses remained unchanged.

3.2008 expenses decreased $5,000 ($30,000 – $25,000).

4.2008 cumulative effect is the difference in the prior year’s depreciation ($40,000 – $25,000).

5.Additional disclosures would be:

a. Footnote describing accounting change.

b. Pro-forma amounts, assuming retroactive application of new

depreciation method.

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