Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–41
(25-35 min.) P 11-54A
Req. 1
Pretax accounting income of 2014 ………………………..
$225,000
+
Additional taxable income for income
earned in 2015 that is taxed in 2014 …………………..
16,000
−
Additional depreciation expense for
MACRS tax depreciation …………………………………..
(38,000)
Taxable income of 2014 ………………………………………..
$203,000
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Income Tax Expense ($225,000 × .33) ………..
74,250
Income Tax Payable ($203,000 × .33) …….
66,990
Deferred Tax Liability ($22,000 × .33) …….
7,260
Req. 3
Kaska Publications, Inc.
Income Statement
Year Ended December 31, 2014
Total revenue ………………………………….
$760,000
Expenses:
Cost of goods sold ……………………..
$355,000
Operating expenses …………………….
180,000
Income tax expense …………………….
74,250
Total expenses …………………………...
609,250
Net income ……………………………………..
$150,750
(20-30 min.) P 11-55B
Req. 1
Midler Cosmetics, Inc.
Income Statement
Year Ended December 31, 2014
Revenues:
Sales revenue ………………………………………………….
$628,000
Dividend revenue …………………………………………….
16,000
Gain on lawsuit settlement ……………………………….
10,400
Total revenues …………………………..…………………
654,400
Expenses and losses:
Cost of goods sold ………………………………………….
$314,200
Selling expenses ……………………………………………..
93,000
General expenses ……………………………………………
81,000
Interest expense ……………………………………………..
25,000
Loss on sale of plant assets …………………………....
15,000
Income tax expense …………………………………………
35,950
Total expenses and losses …………………………...
564,150
Income from continuing operations ……………………..
90,250
Income from discontinued operations,
$20,000, less income tax, $6,100 ………………………
13,900
Income before extraordinary item …………………………
104,150
Extraordinary loss, $14,000,
less income tax savings of $4,300 …………………….
(9,700)
Net income ……………………………………………………….…
$ 94,450
.
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–43
(continued) P 11-55B
Req. 1 (continued)
Earnings per share:
Income from continuing operations
[($90,250 – $1,800* / 31,000**] ……………………………………….
$2.85
Income from discontinued operations ($13,900 / 31,000)……
.45
Income before extraordinary item
[($104,150 − $1,800) / 31,000] ………………………………………..
3.30
Extraordinary loss ($9,700 / 31,000) ………………………………….
(.31)
Net income [($94,450 − $1,800) / 31,000] …………………………..
$2.99
_____
Computations:
*Preferred dividends: $30,000 x 6% = $1,800
**Common shares outstanding: 31,000 (36,000 issued − 5,000 treasury)
Req. 2
The company hoped to earn income from continuing operations equal
(10-15 min.) P 11-56B
Midler Cosmetics, Inc
Statement of Retained Earnings
Year Ended December 31, 2014
Retained earnings balance, December 31, 2013
as originally reported …………………………………………………
$202,000
Prior-period adjustment (debit) ………………………………………..
(9,300)
Retained earnings balance, December 31, 2013
as adjusted ………………………………………………………………..
192,700
Net income for 2014 ………………………………………………………..
94,450
Subtotal
287,150
Dividends declared for 2014 …………………………………………….
(38,800)*
Retained earnings balance, December 31, 2014 ………………..
$248,350
* Dividends for 2014: $37,000 + ($30,000 x 6%) = $38,800
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–45
(10-15 min. — after working P 11-55B) P 11-57B
Estimated value
of Midler
common stock
Estimated annual
Income from continuing
=
income in the future
=
operations ($90,250)
=
$1,289,286
Investment
.07
capitalization rate
(30-40 min.) P 11-58B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
May
1
Accounts Receivable (€65,000 × $1.33) ……
86,450
Sales Revenue ………………………………….
86,450
10
Supplies………………………………………………..
37,440
Accounts Payable (C$52,000 × $.72) …..
37,440
17
Accounts Receivable (₤125,000 × $1.93) ….
241,250
Sales Revenue ………………………………….
241,250
22
Cash (€65,000 × $1.36) …………………………...
88,400
Accounts Receivable ………………………..
86,450
Foreign-Currency Transaction Gain……
1,950
June
18
Accounts Payable ………………………………….
37,440
Cash (C$52,000 × $.71) ………………………
36,920
Foreign-Currency Transaction Gain……
520
24
Cash (₤125,000 × $1.90) ………………………….
237,500
Foreign-Currency Transaction Loss ……….
3,750
Accounts Receivable ………………………..
241,250
Income statement (partial):
Other loss and expense:
Foreign-currency transaction (loss), net
($1,950 + $520 − $3,750) ………………………………………..
$(1,280)
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–47
(continued) P 11-58B
Req. 2
This problem demonstrates that the final amount of a cash receipt or
cash payment on an international transaction may differ from the initial
(20-25 min.) P 11-59B
Req. 1
Earnings per share:
Income from continuing operations
[($449,000 − $45,000) / 245,000]……………………………
$1.65
Loss on discontinued operations ($57,000 / 245,000)…….
(.23)
Income before extraordinary items
[($392,000 − $45,000) / 245,000]……………………………
1.42
Extraordinary gain ($94,000 / 245,000)………………………
.38
Net income [($486,000 − $45,000) / 245,000]………………..
$1.80
_____
Computations:
Preferred dividends: 20,000 × $2.25 = $45,000
Req. 2
Investment Capitalization Rates
6%
8%
10%
Estimated value
of BEL
=
$1.65
$1.65
$1.65
common stock
.06
.08
.10
=
$27.50
$20.63
$16.50
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–49
(30-40 min.) P 11-60B
Req. 1
Southern Harvest Foods, Inc.
Income Statement
Year Ended June 30, 2014
Revenues:
Sales revenue …………………………………………..
$897,000
Less: Sales returns ……………………………..
$21,000
Sales discounts ………………………….
12,000
(33,000)
Net sales revenue …………………………………………
864,000
Expenses:
Cost of goods sold ……………………………………
$363,000
Selling expenses ………………………………………
49,000
General expenses……………………………………..
75,000
Income tax expense ………………………………….
113,100
Total expenses ……………………………………..
600,100
Income from continuing operations ……………….
263,900
Loss on discontinued operations,
$28,000, less income tax saving, $8,400 ……..
(19,600)
Income before extraordinary item ………………….
244,300
Extraordinary gain, $44,000,
less income tax of $13,200 ………………………..
30,800
Net income …………………………………………………..
$275,100
Earnings per share:
Income from continuing operations ($263,900 / 30,000*) ….
$8.80
Loss from discontinued operations ($19,600 / 30,000) ……..
(0.65)
Income before extraordinary item ($244,300 / 30,000) ………
8.14
Extraordinary gain ($30,800 / 30,000)………………………………
1.03
Net income ($275,100 / 30,000) ……………………………………….
$9.17
_____
(continued) P 11-60B
Req. 2
Southern Harvest Foods, Inc.
Statement of Comprehensive Income
Year Ended June 30, 2014
Net income ……………………………………………………
$275,100
Other comprehensive income:
Unrealized loss on investments in AFSS,
$14,000, less income tax savings, $4,200 ..
(9,800)
Comprehensive income …………………………………
$265,300
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–51
(25-35 min.) P 11-61B
Req. 1
Pretax accounting income of 2014 ………………………..
$205,000
+
Additional taxable income for income
earned in 2015 that is taxed in 2014 …………………..
14,000
−
Additional depreciation expense for
MACRS tax depreciation …………………………………..
(21,000)
Taxable income of 2014 ………………………………………..
$198,000
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Income Tax Expense ($205,000 × .32) ………….
65,600
Income Tax Payable ($198,000 × .32) ………
63,360
Deferred Tax Liability ($7,000 × .32) ………..
2,240
Req. 3
Neighbors Publications, Inc.
Income Statement
For the Year 2014
Total revenue……………………………………………….
$790,000
Expenses:
Cost of goods sold…………………………………..
$410,000
Operating expenses …………………………………
175,000
Income tax expense …………………………………
65,600
Total expenses ………………………………………..
650,600
Net income ………………………………………………….
$139,400
Challenge Exercises and Problem
(20 min.) P 11-62
Req. 1
Transaction
Operating
Income
Income
before
Tax
Net
Income
Earnings
per
Share
a.*
NE
NE
NE
NE
b.
+ $45,000
+ $45,000
+ $27,000
+
c.
NE
NE
NE
NE
d.
NE
– $3,000
– $1,800
–
e.
NE
NE
NE
–
f.
– $5,000
– $5,000
– $3,000
–
g.
NE
+ $20,000
+ $12,000
+
h.
NE
NE
NE
–
i.
NE
NE
NE
–
*Assuming the company uses the perpetual inventory method, the
omitted entry only affects balance sheet accounts (Inventory and
Accounts Payable).
Req. 2
Operating
Income
Income
before
Tax
Net
income
Earnings
per
Share
Totals
$440,000
$507,000
$304,200
$4.24*
*($304,200 – $50,000)/ (50,000 + 5,000 + 5,000)