Test Bank – Chapter 13 – The Complete Income Statement 13-21
55. Gleeson Industries consists of four separate divisions: compressed wood products,
chemicals, stone products, and plastics. On March 15, 2015, Gleeson sold the
chemicals division for $625,000 cash. Financial information related to the chemicals
division follows:
Period from 1/1/15 to 3/15/15
Sales
$175,000
Operating expenses
160,000
Net operating income (loss)
$15,000
As of 3/15/15
Assets
$1,850,000
Liabilities
1,400,000
If the income tax rate for the company is 35%, what amount of income tax liability on the
disposal of the business segment will be recognized?
a. $218,750
b. $61,250
c. $5,250
d. $157,500
Solution:
56. The management of Hammer Enterprises shares in a bonus that is determined and paid
at the end of each year. The amount of the bonus is based on 12% of net income from
continuing operations after tax. The bonus is not used in the calculation of income from
continuing operations. During 2015, Hammer was sued and was ordered to pay
$480,000 over and above the amount covered by insurance. The loss is tax deductible
and the company’s tax rate is 35%. The company was last involved in a lawsuit five
years ago. Net income from continuing operations before tax for 2015, excluding the
lawsuit loss was $750,000.
What would management’s 2015 bonus be if the lawsuit is considered unusual by not
infrequent?
a. $175,500
b. $32,400
c. $21,060
d. $20,160
Solution:
If a lawsuit is considered unusual but not infrequent, then it would be classified under other
57. The management of Hammer Enterprises shares in a bonus that is determined and paid
at the end of each year. The amount of the bonus is based on 12% of net income from
continuing operations. The bonus is not used in the calculation of income from
continuing operations. During 2015, Hammer was sued and was ordered to pay
$480,000 over and above the amount covered by insurance. The loss is tax deductible
and the company’s tax rate is 35%. The company was last involved in a lawsuit five
years ago. Net income from continuing operations (before tax for 2015, excluding the
lawsuit loss was $750,000.
What would management’s 2015 bonus be if the lawsuit is considered extraordinary?
a. $90,000
b. $57,600
c. $32,400
d. $58,500
Solution:
If the loss from the lawsuit is considered extraordinary, then the loss would not be used to compute
net income from continuing operations.
58. The following income statement was reported by Snappy Seacraft Company for the year
ending December 31, 2015:
Sales
$85,000
Rent revenue
23,000
Interest income
7,000
Total revenues
$115,000
Cost of goods sold
$52,000
Operating expenses
24,000
Interest expense
12,000
Loss on sale of fixed asset
6,000
Total expenses
94,000
Income from continuing operations (before tax)
$21,000
Less: Income tax
10,000
Income from continuing operations
$11,000
Income from disposed segment (net of tax)
3,000
Gain on sale of disposed segment (net of tax)
2,000
Income before extraordinary items
$16,000
Extraordinary loss (net of tax)
7,000
Income before change in accounting principle
$9,000
Income due to change in accounting principle (net of tax)
6,000
Net income
$15,000
Assume Snappy has an average of 15,000 shares of common stock outstanding during
2015. Based on this information, what amount of earnings per share would be reported
on the income statement as the disposal of the business segment?
a. $0.33
b. $0.20
c. $1.00
d. $0.73
Solution:
Income from continuing operations ………………….. $ 0.73
Disposal of business segment* ………………………. 0.33
59. The following income statement was reported by Snappy Seacraft Company for the year
ending December 31, 2015:
Sales
$85,000
Rent revenue
23,000
Interest income
7,000
Total revenues
$115,000
Cost of goods sold
$52,000
Operating expenses
24,000
Interest expense
12,000
Loss on sale of fixed asset
6,000
Total expenses
94,000
Income from continuing operations (before tax)
$21,000
Less: Income tax
10,000
Income from continuing operations
$11,000
Income from disposed segment (net of tax)
3,000
Gain on sale of disposed segment (net of tax)
2,000
Income before extraordinary items
$16,000
Extraordinary loss (net of tax)
7,000
Income before change in accounting principle
$9,000
Income due to change in accounting principle (net of tax)
6,000
Net income
$15,000
Assume Snappy has an average of 25,000 shares of common stock outstanding during
2015. Based on this information, what amount of earnings per share would be reported
on the income statement as the disposal of the business segment?
a. $0.12
b. $0.20
c. $0.08
d. $0.60
Solution:
Income from continuing operations ………………….. $ 0.44
Disposal of business segment* ……………………….. 0.20
13–26 Test Bank – Chapter 13 – The Complete Income Statement
MATCHING QUESTIONS
1. Indicate whether each event listed below in 1 through 6 is reported as a discontinued
operation (D), extraordinary item (E), a change in accounting principle (A), or a component
of continuing operations (C), by placing the letter of your choice in the space provided. If
an item does not fall into one of these categories, place an X in the blank.
1. Gain on disposal of one of the company’s four corporate office buildings
2. Retired bonds early and incurred a loss
3. Received dividends on stock investments
4. Changed from straight-line to double declining-balance depreciation
5. Tornado damage to the corporate head office that cost $1 million to repair
6. Estimated uncollectible accounts at year-end
Solution:
2. Given below are several items (1 through 4) that will be reported on a company’s financial
statements. Select the letter of the proper financial statement reporting section listed as a
through f. You may use each letter more than once or not at all.
Financial Statement Reporting Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Extraordinary items section of the income statement
d. Cumulative effect of a change in accounting principle section of the income statement
e. A separate comprehensive income item
f. Not reported on the income statement or comprehensive income statement
_____1. A loss incurred by Maranda Corporation due to a strike by employees of the
company
_____2. A large loss of inventory incurred by a meat-packing factory due to a government
FDA inspection which found dangerously high levels of bacteria; no previous
situations in the company’s history
_____3. Manufacturing circuits were determined obsolete and had to be written down to a
nominal scrap value due to an improved manufacturing process
_____4. A loss due to a decline in market value on an available-for-sale investment
_____5. Losses due to a hurricane damage
_____6. Financial impacts of the adoption of a new FASB standard on goodwill.
_____7. The financial effects of outsourcing the company’s industrial product division
Solution:
3. Given below are several items (1 through 4) that will be reported on a company’s financial
statements. Select the letter of the proper financial statement reporting section listed as a
through f. You may use each letter more than once or not at all.
Financial Statement Reporting Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Extraordinary items section of the income statement
d. Cumulative effect of a change in accounting principle section of the income statement
e. A separate comprehensive income item
f. Not reported on the income statement or comprehensive income statement
_____1. A gain due to an early payoff of debt that had a high interest rate
_____2. Another loss of plant assets incurred by a company whose distribution
warehouse is located on an island that has experienced severe flooding three
times in the past 5 years
_____3. A $1 billion loss due to a permanent shutdown of the company’s only subsidiary,
Coastal, Inc, triggered by poor product development
_____4. A foreign currency translation gain at yearend
Solution:
4. e
Test Bank – Chapter 13 – The Complete Income Statement 13-29
4. Select the financial statement section (a through f) in which each of the items listed in 1
through 6 would be reported by writing the letter of the best answer in the space
provided.
Financial Statement Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Extraordinary items section of the income statement
d. Cumulative effect of a change in accounting principle section of the income statement
e. Balance sheet
f. Not necessary to report on a financial statement
1. ____ Government expropriation of plant location in Venezuela
2. ____ Financial effects of the adoption of a new FASB standard regarding post–
retirement benefits
3. ____ Financial effects of dropping a company’s domestic product division
4. ____ Unusual and infrequent gain from a plant explosion
5. ____ Unrealized gain/loss from trading securities
6. ____ Interest revenue
Solution:
5. Select the financial statement section (a through g) in which each of the items listed in 1
through 5 below would properly be reported by writing the letter of the best answer in the
space provided.
Financial Statement Sections
a.
Income from continuing operations section of the income statement
b.
Discontinued operations section of the income statement
c.
Extraordinary items section of the income statement
d.
Cumulative effect of a change in accounting principle section of the income statement
e.
Statement of shareholders’ equity
f.
Balance sheet
g.
Not necessary to report on a financial statement
1. _____ Declared cash dividends for the first time in the history of the corporation
2. _____ Incurred a gain on the sale of four Preston franchise stores, but held onto
the Little Steps chain
3. _____ Incurred a huge loss from a hurricane that destroyed the company’s
Louisiana packaging plant; no previous hurricanes have occurred at this
location
4. _____ Recorded interest income for the year
5. _____ Incurred $14,000 to replace the company’s office products (letterhead,
envelopes, pens, etc.) with a new logo to promote a new product line
Solution:
KP 3 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
SHORT PROBLEMS
1. Wellman Inc., a computer manufacturer located in Texas, lost an uninsured building due
to the infrequent and unusual occurrence of a hurricane. The building has a balance
sheet value of $20,000 and will cost $165,000 to rebuild. Wellman’s income tax rate is
40%. Calculate the amount of any extraordinary loss that should be reported on
Wellman’s income statement. Prepare a partial income statement that shows how the
item will be presented.
Solution:
2. The following information was taken from the 2015 financial records of Hopewell
Company.
Debit
Credit
Operating revenues
187,000
Operating expenses
132,500
Gain on sale of short-term investments
15,200
Loss on sale of business segment
21,000
Income earned on disposed business segment
3,000
Extraordinary loss
5,000
Income due to change in accounting principle
12,500
Retained earnings (beginning balance)
72,000
Dividends declared
18,000
The company’s income tax rate is 35 percent, and the items above are treated identically
for the financial reporting and tax purposes.
REQUIRED:
Prepare an income statement using this information.
Solution:
Hopewell Company
Income Statement
For the Year Ended December 31, 2015
Revenue:
Operating revenues …………………………………………. $187,000
Total revenue …………………………………………………. $187,000
Expenses:
Operating expenses ………………………………………… 132,500
Other revenue …………………………………………………….. 15,200
3. Canter Company operates a boat rental service in North Carolina. The company was
involved in the following transactions and events during 2015:
1. The supplies, gasoline, and other maintenance item costs incurred associated with the
rentals are $420,000.
2. Provided rental boats to customers during 2015 for total revenue of $880,000.
3. Damage by an earthquake to one of Canter’s uninsured rental centers in Georgia, during
2015 was $440,000. Earthquakes have never occurred here before.
4. Sued by a rental customer that got his head caught in the ladder of a rental boat. The
customer will probably win the suit that is estimated at $80,000. Lawsuits are common in
the rental industry.
5. Switched from double-declining-balance to straight–line depreciation. Effect was to
decrease the accumulated depreciation account by $58,000.
6. Declared and paid $25,000 in dividends.
For each transaction, state in which section of the income statement it should be
reported and give the dollar amount that should be reported. State whether each
reporting amount is added or subtracted on the income statement and if the specific line
item on the income statement is reported net of taxes. Canter’s income tax rate is 30%.
Solution:
KP 3,4 BT: AN Difficulty: Difficult TOT: 6 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
4. The following are the revenue and expense accounts for the year ending August 31,
2015, for Hammer Corporation:
Sales revenue
$70,000
Interest revenue
3,000
Interest expense
2,000
Gain from sale of land
8,000
Cost of goods sold
45,000
Administrative expense
9,000
Extraordinary gain
3,500
Income tax expense
4,200
A. Calculate the amount of gross profit for Hammer Corporation for the year ending
August 31, 2015.
B. How much should be reported as ‘Other Revenues’?
Solution:
5. Badger, Inc. is planning a major stock issuance in early 2015. During 2014, the company
reported net income from operations of $530,000 before taxes. The items below
describe major events that occurred during 2014.
1. A $52,000 gain was recognized on the sale of a subsidiary
2. Inventory was written down by $21,000 due to obsolescence
3. A forced government takeover of a company plant in India that had a book value of
$320,000
4. A $31,000 gain was recognized due to the adoption of a new FASB statement
The company’s tax rate is 30 percent.
A. Which items should not be reported as a component of income from continuing
operations?
B. Suppose management decided to exclude all of the above items from income from
continuing operations. What effect might this have on investor and creditor
decisions?
Solution:
6. Hamilton Corp. had the following infrequent income statement items during 2014:
• $45,000 of dividends received from a stock investment
• $20,000 gain on the sale of a plant asset which became outdated because of new technology
• $19,000 loss due to the sale of treasury stock at a price less than its original cost
• $34,000 fair value adjustment increase to market for available–for-sale investments
• $50,000 interest expense for the year of which only $42,000 was actually paid
How much should Hamilton report as a component of ‘income from continuing operations’?
Solution:
7. On January 1, total assets and liabilities were $30,000 and $12,000, respectively. On
December 31, total assets and liabilities were $28,000 and $20,000, respectively. During
the year, $7,000 of dividends were declared and paid and no stock was purchased or
issued. Calculate the amount of net income or loss for the year.
Solution:
Beginning shareholders’ equity ($30,000 – $12,000)
$ 18,000
Less dividends declared
(7,000)
Less ending shareholders’ equity ($28,000 – $20,000)
(8,000)
Net loss
$ 3,000
KP 2 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting