13–36 Test Bank – Chapter 13 – The Complete Income Statement
8. Nigel Corporation reported income from continuing operations before taxes and before
adjustment of the transactions below in the amount of $1,000,000. A review of the 2015
income statement revealed several items that appeared to be incorrectly categorized. The
following items were flagged:
a. Recorded a loss of $29,000 due to a vandalism attack by a gang on one of the company
warehouses; vandalism attacks have occurred at least once per year since the company began
operations
b. Incurred an unusual and infrequent hurricane loss of $41,000 to a company warehouse
c. Closed all five of the company’s supermarkets in Manhattan after bag boys went on strike for an
extended period of time; shutdown expenses totaled $38,000
d. Floods from overflowing toilets on the upper floors of a downtown office building in Denver
caused more than $8 million in repairs. Flooding toilets are rare in this area and have never
occurred in office buildings in Denver before. Insurance coverage paid $8.6 million to replace
the damaged portions of the building.
Nigel has a 30% tax rate. Calculate income from continuing operations. For any item that
is NOT a component of continuing operations, state how it would be reported.
Solution:
Income from continuing operations before taxes and before adjustments
$1,000,000
a. Vandalism loss
(29,000)
c. Shutdown expenses due to strike
(38,000)
Income from continuing operations before taxes
933,000
Income taxes expense
(279,900)
Income from continuing operations
$ 653,100
Other items:
Hurricane loss = extraordinary loss because it is both unusual and infrequent
Gain from plumbing damage = extraordinary gain because it is both unusual and
infrequent
KP 2 BT: AN Difficulty: Moderate TOT: 6 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
9. On January 1, total assets and liabilities were $21,000 and $8,000, respectively. On
December 31, total assets and liabilities were $30,000 and $7,000, respectively. During
the year, $9,000 of dividends were declared and paid and $3,000 of stock was issued.
Calculate net income for the year.
Solution:
Beginning shareholders’ equity ($21,000 – $8,000)
$ 13,000
Less dividends declared
(9,000)
Less ending shareholders’ equity ($30,000 – $7,000)
(23,000)
Add additional stock issued
3,000
Net income
$16,000
KP 2 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
10. On January 1 and December 31, 2015, retained earnings were $23,000 and $42,000,
respectively. During the year, the only dividends were an ordinary stock dividend
recorded at $11,000. Calculate net income for 2015.
Solution:
Beginning retained earnings
$ 23,000
Less stock dividends declared
(11,000)
Less ending retained earnings
(42,000)
Net income
$ 30,000
KP 2 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
11. Cabell Inc. reported ‘income from operations before taxes’ in the amount of $402,000
before including the following items for the year ending December 31, 2015:
• On December 31, 2015, borrowed long-term debt of $50,000 that limits dividends to 10
percent of net income from continuing operations
• $21,000 unrealized gain from fair value adjustment related to available–for-sale investments
• $30,000 loss recognized on the sale of a trading security
• $58,000 loss recognized on a lawsuit relating to patent violations
• $11,000 government fine for environmental violation
• $63,000 write-down of obsolete inventory
• $25,000 loss on the early retirement of debt.
The company’s income tax rate is 30 percent. No taxes have been considered in any
information provided. Prepare a calculation of income from operations starting with
income from operations before taxes, as tentatively reported. Omit the heading. Be sure
to label correctly.
Solution:
Income from operations before taxes, as tentatively reported
$402,000
Other revenues and expenses:
Write-down of obsolete inventory
Loss on sale of a trading security
Loss on a lawsuit relating to patent violations
Government fine for environmental violation
(162,000)
Adjusted income from continuing operations before taxes
$240,000
Income taxes expense
72,000
Income from continuing operations
$168,000
12. Hubbell Service showed the following information for 2015: Net sales revenue,
$410,000; interest revenue, $11,000; cost of goods sold, $220,000; operating expense,
$15,000, extraordinary gain on retirement of debt, $30,000; and dividends declared,
$14,000. Calculate operating income for 2015.
Solution:
13. The following are some accounts for Marvell Corp. for 20159:
Sales revenue
$102,000
Cost of goods sold
85,000
Administrative expense
34,000
Interest expense
3,000
Loss from disposal of segment
21,000
Gain from sale of land
4,000
Stock dividends declared
9,000
Loss due to permanent value decline of plant asset
6,000
Extraordinary loss from hurricane
19,000
Unrealized gain from trading securities
5,000
Interest revenue
1,000
All amounts are before income taxes. Marvell has a 30% tax rate. Determine the amount
of Marvell’ ‘other revenue’ and ‘other expenses’ for 2015. List all non-income statement
items and indicate on which financial statement they are reported.
Solution:
14. Hilton Corporation’s income statement for the year ending December 31, 2015, appears
below.
Net sales
$810,000
Cost of goods sold
(610,000)
Gross profit
200,000
Selling and administrative expenses
(90,000)
Net operating income
110,000
Gain on sale of securities
56,000
Interest expense
(3,000)
Income from continuing operations before tax
163,000
Income tax expense
(48,900)
Income from continuing operations
114,100
Extraordinary gain (net of tax)
22,000
Income before cumulative effect
136,100
Income effect due to change in accounting principle
32,000
Net income
$168,100
Compute the maximum amount of dividends Hilton can pay if it has a debt covenant
expressed as 20 percent of net income, and as 20 percent of net operating income.
Which amount would a creditor more likely use as the restriction on dividends? Explain.
Solution:
Net income: 20% x $168,100 = $33,620
15. Jarvis Company provided the following information for the year ending December 31,
2015:
Cost of goods sold
$400,000
Gain on sale of business segment
20,000
Income tax rate
30%
Interest income
5,000
Interest expense
7,000
Loss from operation of discontinued business segment
12,000
Operating expenses
23,000
Revenue from sales
730,000
Number of shares of common stock outstanding
100,000
Prepare an income statement in good form. You may omit the heading. Include all
earnings per share amounts required for the year ending December 31, 2015.
Solution:
Revenue from sales
$730,000
Cost of goods sold
(400,000)
Gross profit
$330,000
Operating expenses
(23,000)
Other revenues(expenses):
Interest income
5,000
Interest expense
(7,000)
Income from operations before taxes
$305,000
Income taxes expense
(91,500)
Income from continuing operations
$213,500
Discontinued operations:
Loss from operations of discontinued business
segment, net ($12,000 – $3,600)
($8,400)
Gain on sale of business segment, net
($20,000 – $6,000)
14,000
5,600
Net income
$219,100
Earnings per share:
Income from continuing operations
$2.14
Discontinued operations per share
0.06
Net income per share
$2.20
KP 3,5 BT: AN Difficulty: Difficult TOT: 6 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
Test Bank – Chapter 13 – The Complete Income Statement 13-41
Use the information that follows concerning Palomar Corp. to answer questions 16
through 19.
Nichol Corp. has 20,000 shares of common stock outstanding. For the year ending December
31, 2015, the company tentatively reported income from continuing operations before taxes of
$320,000. Nichol Corp. has a 30 percent tax rate. The additional information given below has
not been recorded in the accounts unless specifically stated.
a. The company is located in Cheyenne, Wyoming . During the year, an earthquake destroyed some
of Nichol’s assets amounting to a loss of $120,000. Earthquakes are considered infrequent in this
area and are very unusual.
b. The company’s employees went on strike for six weeks in March of 2015. Revenues would have
been about $23,000 more had the strike not occurred. No adjustment was recorded.
c. During 2015, the company changed its method of accounting for inventories from FIFO to
weighted average. Cost of goods sold related to prior years would have been $39,000 greater.
d. The company’s accounts include $47,000 as Unrealized Holding Gain from Trading Investments
at December 31, 2015.
16. How much should be reported on the income statement for the year ended December
31, 2015 as ‘Extraordinary Gains or Losses’?
17. Calculate how much should be reported on Nichol’s income statement as ‘Income from
Continuing Operations’ for the period ended December 31, 2015.
Solution:
Income from continuing operations before taxes:
($320,000 + $47,000)
Income taxes at 30%
Income from continuing operations
KP 3,4 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
18. How much should be reported on the income statement for the year ended December
31, 2015, as ‘Cumulative Effect of a Change in Accounting Principle’?
Solution:
Cumulative effect of an accounting principle change
Tax effect
Cumulative effect of a principle change, net of tax
Extraordinary loss due to earthquake
Tax effect
Extraordinary loss, net of tax
19. Name the specific items for which Nichol Corp. must apply intraperiod tax allocation in its
financial statements.
20. On January 1 and December 31, retained earnings were $40,000 and $53,000,
respectively. During the year, $21,000 of dividends were declared. Calculate net income
during the year.
Solution:
21. The following information was taken from the accounting records of ABCO Corporation
for the year ending December 31, 2015.
Cost of sales
$342,000
Loss on sale of business segment
23,000
Profit from operations of discontinued business segment
19,000
Operating expenses
176,000
Revenue from sales
690,000
Number of shares of common stock outstanding
100,000
Income tax rate
30%
Appropriated retained earnings for plant expansion
176,000
Dividends
130,000
Gain on sale of plant asset
23,000
A. In good form, prepare the section of the income statement that begins immediately
under ‘income from continuing operations’. Do not be concerned with calculating the
amount reported as ‘income from continuing operations.’
B. List all the items that would appear in the ‘Other Revenue/Other Expenses’ section of
the income statement.
C. How is the number of shares of common stock outstanding used on the income
statement?
Solution:
A. Income from continuing operations
$ xxxx
Discontinued operations, net, ($19,000 – $5,700)
Loss on sale of business segment, net,
($23,000 – $6,900)
(2,800)
Net income
$xxxx
B. Gain on sale of plant asset, $23,000
C. The calculation of earnings per share amounts uses the number of common shares
outstanding as its denominator. Earnings per share is required on the income
statement.
KP 3,5 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
22. The following are the revenue and expense accounts of the current year for ABCO
Corporation:
Sales revenue
Interest revenue
Interest expense
Gain from sale of land
Cost of goods sold
Administrative expense
Gain due to hurricane loss – infrequent and unusual
All items are before income taxes. The income tax rate is 20%. Calculate any
extraordinary gain or loss that should be disclosed on the income statement.
Solution:
23. Balance sheet information of Digital Solutions, Inc. at December 31, 2014, is provided
below.
Assets
$100,000
Liabilities
34,000
Shareholders’ equity
66,000
During 2015, the company entered into the following transactions:
1. Common stock was issued for $12,000 cash.
2. Services were performed for $45,000 cash.
3. Cash expenses of $31,000 were incurred.
4. Long-term liabilities of $18,000 were paid.
5. The market value of an available–for-sale investment owned at yearend exceeded its
cost by $6,000.
6. Dividends of $9,000 were declared and paid.
A. Which transactions are operating?
B. Compute net income for the year ending December 31, 2015.
C. Compute comprehensive income for the year ending December 31, 2015.
Solution:
SHORT ESSAY QUESTIONS
1. Identify types of transactions that are considered exchanges of liabilities and
shareholders’ equity. Why are these transactions considered ‘financing’?
Solution:
2. How do items at the top of the income statement differ from items at the bottom of the
income statement?
Solution:
As one moves from the top to the bottom of the income statement, the events become
3. How are operating transactions that are not based primarily on the normal operations of
a company reported on the financial statements?
Solution:
Some revenues and expenses from activities not germane to a company’s primary
4. One of the three objectives of financial reporting directly relates to the income statement
and measure of income. Indicate the context of this objective, and explain how it relates
to the earnings process.
Solution:
This objective of financial reporting that directly relates to earnings states that the
5. Identify the GAAP requirements of comprehensive income.
Solution:
6. What is the definition of a business segment and what special reporting is required for
discontinued segments?
Solution:
7. Is consistency violated when a company changes accounting principles?
Solution:
The concept of consistency generally means that once a company chooses an
8. Why are losses resulting from employee layoffs and write-downs such as inventory and
receivables reported as ‘other expenses and losses’?
Solution:
9. Discuss the reasons for and the financial statement effects of intraperiod tax allocation.
Solution:
Intraperiod tax allocation is a concept that includes the income tax effect of a particular
transaction with the transaction itself. Four items are reported ‘net of tax’ on the income
10. What is ‘pro forma’ as it relates to the income statement?
Solution:
Pro forma is also called ‘as if.’ Changes in an accounting principle can make it more
11. How does diluted earnings per share differ from the traditional basic earnings per share?
Solution:
Diluted earnings per share is calculated for companies that have a potential for
12. What is earnings persistence?
Solution:
Earnings persistence reflects the extent to which particular dollar amounts of earnings
13. How has the movement toward internationalization of many businesses increased
reporting of the number of special gains and losses on the income statement?
Solution:
International operations are subject to certain risks and opportunities, including currency
fluctuations, government actions, and investment earnings which are created by
IFRS questions
1. Which of the following statements is true?
a. IFRS relies less heavily on fair market value accounting than does US GAAP
b. IFRS relies more heavily on fair market value accounting than does US GAAP
c. Neither IFRS nor US GAAP will use fair market value accounting in the near
future
d. Only US GAAP uses fair value market accounting.