2-31
Item AA: 2017 Total stockholders’ equity:
First solve for (BB) total liabilities and stockholders equity. Next solve
for total liabilities. Current liabilities ($1,463) plus noncurrent liabilities
P2–7. Converting from cash to accrual
Requirement 1:
Accounts receivable
Beginning accounts
receivable
$128,000
Solve for:
sales on account
$326,000
$319,000
Cash received on account
Ending accounts receivable
$135,000
$128,000 + X – $319,000 = $135,000
X = $326,000
Requirement 2:
Salaries payable
$8,000
Beginning salaries payable
Cash paid for salaries
$47,000
Solve for:
$44,000
salary expense
$5,000
Ending salaries payable
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Requirement 3:
To solve for cost of goods sold we must first determine what our purchases
for August were by analyzing Accounts payable.
Accounts payable
$21,000
Beginning accounts payable
Cash paid to suppliers
$130,000
$134,000
Solve for: purchases on account
$25,000
Ending accounts payable
$21,000 + X – $130,000 = $25,000
X = $134,000
We can now solve for Cost of good sold by plugging the purchases into the
Inventory account.
Inventory
Beginning inventory
$33,000
purchases (solved above)
$134,000
$142,000
Solve for: cost of goods sold
Ending inventory
$25,000
$33,000 + $134,000 – X = $25,000
X = $142,000
P2-8. Journal entries and statement preparation
Requirement 1:
a. DR Cash $90,000
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c. DR Inventory $15,000
CR Accounts payable $15,000
DR Accounts payable $10,000
CR Cash $10,000
CR Notes payable $12,000
2-34
Bob’s Chocolate Chips and More
Income Statement
For Month Ended October 31, 2014
Sales revenue
$ 35,000
Less: Cost of goods sold
9,000
Gross margin
26,000
Less: Operating expenses
Wage expense
$ 5,600
Rent expense
500
Utility expense
800
Depreciation expense
417
Interest expense
450
7,767
Net income
$ 18,233
Bob’s Chocolate Chips and More
Balance Sheet
October 31, 2014
Assets
Cash
$ 77,500
Accounts receivable
9,000
Inventory
6,000
Prepaid rent
1,000
Equipment
$ 30,000
Less: Accumulated depreciation
417
Net equipment
29,583
Total assets
$ 123,083
Liabilities
Accounts payable
$ 5,000
Interest payable
450
Wages payable
400
Notes payable
9,000
Total liabilities
14,850
Shareholders’ equity
Contributed capital
90,000
Retained earnings
18,233
Total liabilities and shareholders’ equity
$ 123,083
2-35
P2–9. Determining missing amounts on income statement
AJAX Corporation
Income Statement
For the Year Ended December 31, Year 1
($ in thousands)
Net revenues
$ 1,275,700
Cost of goods sold
793,358
Gross profit
482,342
Operating expenses
Selling
159,016
General and administrative
176,868
Research and development
97,230
Amortization of intangible assets
7,346
Restructuring costs and asset write-downs
24,444
Total operating expenses
464,904
Operating income
17,438
Interest income
23,944
Interest expense
(13,714)
Other income, net
41,660
Income from continuing operations before taxes
69,328
Provision for income taxes
(20,094)
Income from continuing operations
49,234
Income from discontinued operations, net of taxes
97,808
Income before extraordinary item
147,042
Extraordinary gain on extinguishment of debt, net of taxes
2,242
Net income
$ 149,284
Requirement 1:
Recasting the Year 1 income statement. Following are the steps needed to
calculate the unknowns. The correct income statement appears above.
a) Net revenue:
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c) Amortization of intangible assets:
Amortization of intangible assets can be determined by subtracting the
e) Interest expense:
Income from continuing operations before income taxes ($69,328) equals
f) Income from continuing operations:
g) Income before extraordinary:
Requirement 2:
While it may not be immediately obvious to students, this item had no direct
impact on AJAX’s Year 1 cash flows. This item represents the accrual of
2-37
future periods as the new products they produce are brought to market. The
idea behind this approach is the matching principle. Moreover, since these
expenditures are made to benefit future operations and sales, they should be
charged to the future periods that benefit.
Disagree: If you disagree, you might argue that many R&D projects fail, while
be reliably measured and reported on the balance sheet.
Requirement 4:
To forecast next period’s earnings you need to examine what has transpired
during the current period. Any unusual and non-recurring gains (revenues)
and or expenses (losses) should be disregarded, since they are not
1 operating income of $17,438 plus restructuring costs (considered a
special or unusual charge that would normally not be repeated) of
$24,444.)
▪ Interest income and expense and other income would be analyzed and
revised if necessary and added to operating income. Projected tax rates
2-38
AJAX Corporation
Statement of Consolidated Cash Flows
Year Ending December 31, Year 1
($ in thousands)
Cash Flows from Operating Activities
Net income
$ 149,284
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring costs and asset write-downs
24,444
Depreciation and amortization
65,104
Deferred tax provision
7,246
Provision for allowance for doubtful accounts
15,300
Minority interest
(806)
Gain on sale of product rights
(30,000)
Losses on disposal of assets, net
1,688
Gains on extinguishment of debt
(2,242)
Income from discontinued operations
(97,808)
Changes in assets and liabilities:
Increase in accounts receivables
(19,172)
Decrease in inventories
27,398
Increase in other current assets
(21,134)
Decrease in other assets
16,000
Decrease in accounts payable, accrued expenses
and other current liabilities
(5,734)
Increase in other long-term liabilities
1,814
Other, net
1,782
Net cash provided by operating activities of
discontinued operations
10,056
Net cash provided by operating activities
$ 143,220
Cash Flows from Investing Activities
Proceeds from divestitures
175,770
Capital expenditures
(129,244)
Proceeds from sales of assets
44,318
Acquisition of intangibles
(35,086)
Net investing activities of discontinued operations
(404)
Net cash provided by investing activities
$ 55,354
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continued
Cash Flows from Financing Activities
Borrowings on long-term debt and loans payable
7,790
Payments on long-term debt and loans payable
(58,304)
Issuance of common stock
5,916
Repurchase of common stock
(131,862)
Net financing activities of discontinued operations
20
Net cash used for financing activities
($176,440)
Effect of Exchange Rate changes on Cash
(3,418)
Net Increase in Cash and Cash Equivalents
18,716
Cash and Cash Equivalents at Beginning of Year
398,470
Cash and Cash Equivalents at End of Year
$ 417,186
P2-10. Determining income from continuing operations and gain (loss) from
discontinued operations
(AICPA adapted)
Requirements:
Helen Corporation
Partial Income Statement
For the Years Ended December 31
1) The amounts to be reported for income from continuing operations
after taxes excludes the losses from operation of discontinued
division and is calculated as follows:
2014
2013
Income from continuing operations,
before taxes
$ 1,600,000
$ 1,200,000
Loss from operation of discontinued
division, before taxes, added back
640,000
500,000
Income from continuing operations,
before taxes (excluding discontinued
division):
$ 2,240,000
$ 1,700,000
Income tax expenses
1,120,000
850,000
Income from continuing operations,
after taxes
1,120,000
850,000
continued
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2-41
2)
2014
2013
Income from continuing operations,
after taxes
$ 1,120,000
$ 850,000
Discontinued operations:
Loss from operation of discontinued
division, net of taxes benefits of
$320,000 in 2014 and $250,000 in
2013
(320,000)
(250,000)
Gain from sale of discontinued division,
net of taxes expense of $450,000
450,000
– 0 –
Net income
$ 1,250,000
$ 600,000
P2-11 Income statement preparation with irregular items
Jordan Wing, Inc.
Partial Income Statement
For the Year Ended December 31, 2014
Income from continuing operations
before income taxes
$ 5,184,900
**
Income tax expense
(1,814,715)
Income from continuing operations
$ 3,370,185
Discontinued operations:
Loss from discontinued operations, net of
tax benefit of $120,750
(224,250)
Income before extraordinary item
$ 3,145,935
Extraordinary loss, net of tax benefit of $29,225
(54,275)
Net income
$ 3,091,660
Earnings per common share:
Income from continuing operations
$ 22.47
Discontinued operations:
Loss from discontinued operations, not of
net of tax
(1.50)
Income before extraordinary item
20.97
Extraordinary loss, net of income tax effect
(0.36)
Net income
$ 20.61
$ 3,091,660
Pretax income = (Net income / (1 – tax rate)
4,756,400
Add: Loss on discontinued operations
345,000
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• The gain from selling Xerox stock should be among the items comprising
income from continuing operations and separately disclosed.
• The unrecorded impairment loss (although discovered in 2014) constitutes
P2-12. Components held for sale
Silvertip Construction, Inc.
Partial Income Statement
For the Year Ended December 31, 2014
Income from continuing operations
$ 1,650,000
Discontinued operations:
Loss from operation of held for sale business
component, net of tax benefit of $33,250
*(61,750)
Impairment loss on held for sale component,
net of tax benefit of $24,185
**(44,915)
Net income
$ 1,543,335
Earnings per share:
Income from continuing operations
$ 1.65
Discontinued operations:
Loss from operation of held for sale business
component, net of tax
(0.06)
Impairment loss on held for sale component,
net of tax
(0.04)
Net income
$ 1.54
Fair value of component
$ 735,000
-Expected cost to sell component (FV x .06)
(44,100)
Fair value of component minus cost to sell
690,900
-Book value of component
(760,000)
Impairment loss on held for sale component
$ (69,100)
* Operating loss on component
= pretax loss x (1 – tax rate) = $95,000 x (1 – .35) = $61,750
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** Impairment loss on component
= pretax loss x (1 – tax rate) = $69,100 x (1 – .35) = $44,915
P2-13. Preparing comprehensive income under single-step format
Liz’s Theatrical Supplies, Inc.
Statement of Income and Comprehensive Income
For the Year Ended December 31, 2014
Revenues and gains:
Net sales
$ 791,650
Rent revenue
16,000
Interest income
4,650
Total revenue and gains
812,300
Expenses and losses:
Cost of goods sold
(490,823)
Selling and administrative
(158,330)
Loss on write-off of obsolete inventory
(23,500)
Total expenses
(672,653)
Income from continuing operations, before taxes
139,647
Income taxes
(53,066)
Income from continuing operations
86,581
Discontinued operations:
Income from discontinued operations, net of tax
43,400
Loss from disposal of discontinued component,
net of tax
(58,900)
Income before extraordinary item
71,081
Extraordinary loss, net of tax
(31,000)
Net income
40,081
Other comprehensive income (loss), net of tax:
Unrealized holding loss on available-for-sale
securities, net of tax
(9,300)
Comprehensive income
$ 30,781
P2-14. Extinguishing debt early
Requirement 1:
When management makes early debt extinguishment a part of the company’s
risk management strategy, such extinguishments are deemed to be part of
P2-15. Reporting discontinued operations
**Income from continuing operations, before taxes
2,355,600
Income taxes
(824,460)
Income from continuing operations
1,531,140
Discontinued operations:
Income from operations of discontinued residential
service component, net of taxes of $64,890
120,510
Gain from sale of discontinued residential service
component, net of taxes of $8,050
14,950
Income from operations of held-for-sale commercial
service component, net of taxes of $75,250
139,750
Loss on impairment of held-for-sale assets of
commercial service component, net of tax benefit
of $2,100
(3,900)
Net income
$ 1,802,450