Practice
Check your answer
Write your response and explain your reasoning.
Use the Cedar Trail worked-example facts. Critique the statement that the new method is preferable because it is easier and produces smoother earnings. Then reconstruct opening Year 2 equity and Years 2 and 3, including tax and basic EPS, and explain where a bonus triggered by changed reported income belongs.
Compare your reasoning with the worked answer
At 25 percent tax, $240,000 pre-period pretax becomes $180,000 opening equity. Year 2 $70,000 pretax becomes $52,500 after tax; Year 3 $(30,000) becomes $(22,500). Indirect consequences remain outside the retrospective direct bridge.