77
Chapter 4
Income Statement
QUESTIONS
4- 1. Extraordinary items are events or transactions that are distinguished by their
before extraordinary items.
4- 2. d, f
4- 3. Examples include sales of securities, write-down of inventories, disposal of a
in income before the income tax is deducted. Also, net-of-tax treatment would
infer that these items are extraordinary.
4- 4. Under the equity method, equity in earnings of nonconsolidated subsidiaries is
operations of the business in question, but rather from a subsidiary.
4- 5. It would appear that this is the disposal of a product line that is specifically
4- 6. Unusual or infrequent items relate to operations. Examples are write-downs of
receivables and write-downs of inventory.
4- 7. A new FASB issued in May, 2005 requires retrospective application to prior
unless it is impracticable.
4- 8. The declaration of a cash dividend reduces retained earnings and increases
and cash.
4- 9. First, a stock split is usually for a larger number of shares. Secondly, a stock
78
4-10. If a firm consolidates subsidiaries that are not wholly owned, the total
income – noncontrolling interest.
4-11. The statement of retained earnings summarizes the changes to retained
retained earnings.
4-12. 1. Appropriations as a result of a legal requirement
Appropriations as a result of management discretion are not likely a detriment
to the payment of a dividend.
4-13. The balance sheet shows the account balances as of a particular point in time.
transactions for the period of time.
4-14. a. Net income – noncontrolling interest is an income statement item that
4-15. The two traditional formats for presenting the income statement are the
(full disclosure).
2012 2011 2010
4-16. Earnings per share $1.40 $1.00 $ .80
4-17. Accountants have not accepted the role of disclosing the firm’s capacity to
statements.
4-18. Management does not usually like to tie comprehensive income closely with
4-19. This represents a finer line item disclosure that under U.S. GAAP. Many of
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different than under IFRS.
4-20. This represents a finer line item disclosure than under U.S. GAAP. Many of
the items are similar but with an IAS describing what goes by each nature.
PROBLEMS
PROBLEM 4-1
a.
Decher Automotives
Income Statement
For the Year Ended December 31, 2012
Sales
$
Cost of sales
Beginning inventory
$
650,000
Purchases
460,000
Merchandise available for sale
$
1,110,000
Less: Ending inventory
(440,000)
Cost of sales
Gross profit
Operating expense:
Selling expenses
$
43,000
Administrative expenses
105,000
Operating income
Other income:
Dividend income
Other expense:
Interest expense
Income before taxes and extraordinary items
Income taxes
Income before extraordinary items
Extraordinary items: flood loss, net of tax
Net income
$
b.
Earnings per share:
Before extraordinary items
$
1.15
Extraordinary items (loss)
(0.30)
Net income
$
0.85
80
c.
Decher Automotives
Income Statement
For the Year Ended December 31, 2012
Revenue:
Sales
$
Other income
Total revenue
$
Expenses:
Cost of sales
$
670,000
Operating expense
105,000
Interest expense
20,000
Income before taxes and extraordinary items
$
215,000
Income taxes
(100,000)
Income before extraordinary items
$
Extraordinary items: flood loss, net of tax
Net income
$
PROBLEM 4-2
Lesky Corporation
Income Statement
For the Year Ended December 31, 2012
Revenue from sales
$
362,000
Cost of products sold
(242,000)
Gross profit
$
120,000
Operating expenses:
Selling expenses
$
47,000
Administrative and general expenses
11,400
(58,400)
Operating income
$
61,600
Other items:
Other income:
Rental income
$
1,000
Interest income
2,400
Other expense:
Interest expense
(2,200)
Income before tax
$
62,800
Federal and state income taxes
(20,300)
Net income
$
42,500
81
PROBLEM 4-3
Consolidated Can
Income Statement
For the Year Ended December 31, 2012
Sales
$
480,000
Cost of products sold
(410,000)
Gross profit
70,000
Selling and administrative expenses
( 42,000)
Operating income
28,000
Other income
1,600
29,600
Interest expense
(8,700)
Income before tax and extraordinary items
20,900
Income tax
(9,300)
Income before extraordinary items
11,600
Extraordinary gain, net of tax
1,000
Net income
12,600
Retained earnings 1/1
270,000
282,600
Less: dividends
(3,000)
Retained earnings
$
279,600
82
PROBLEM 4-4
a.
Taperline Corporation
Income Statement
For the Year Ended December 31, 2012
Revenues:
Sales
$
670,000
Rental income
3,600
Gain on the sale of fixed assets
3,000
Total revenues
$
676,600
Expenses:
Cost of sales
$
300,000
Selling expenses
97,000
General and administrative expenses
110,000
Depreciation expense
10,000
Interest expense
1,900
(518,900)
Income before extraordinary items and taxes on income
$
157,700
Income tax
(63,080)
Income before extraordinary item
$
94,620
Casualty loss
$
30,000
Less: Tax saving
12,000
(18,000)
Net income
$
76,620
Income per share on common stock:
(30,000 shares outstanding)
Income before extraordinary items
$
3.15
Net income
$
2.55
83
b.
Taperline Corporation
Income Statement
For the Year Ended December 31, 2012
Sales
$
670,000
Cost of sales
(300,000)
Gross profit
370,000
Operating expenses
Selling expenses
$
97,000
General and administrative expenses
110,000
Depreciation expense
10,000
217,000
Operating income
$
153,000
Other revenue:
Rental income
$
3,600
Gain on the sale of fixed assets
3,000
6,600
$
159,600
Other expenses:
Interest expense
(1,900)
Income before extraordinary items and taxes on income
$
157,700
Income tax
(63,080)
Income before extraordinary item
$
94,620
Casualty loss
$
30,000
Less: Tax saving
12,000
(18,000)
Net income
$
76,620
Income per share on common stock:
(30,000 shares outstanding)
Income before extraordinary items
$
3.15
Net income
$
2.55
84
PROBLEM 4-5
Tax Rate =
Taxes
=
$20,000
=
50%
Income Before
Taxes
$40,000
Provision for unusual write-offs
$
50,000
Less: tax effects (50% x $50,000)
25,000
Net item
$
25,000
Extraordinary charge, net of tax of $10,000
$
50,000
Net earnings (loss)
(30,000)
Net earnings with nonrecurring items
removed [(30,000) + $25,000 + $50,000]
$
45,000
PROBLEM 4-6
Sales
$
4,000,0001
Cost of sales
(2,000,000)
Gross profit
$
2,000,000
Operating expenses:
Administrative expenses
$
400,0001
Selling expenses
600,0002
(1,000,000)
Operating income
$
1,000,000
Interest expense
(110,000)3
Earnings before tax
$
890,000
Income tax (48%)
(427,200)
Net income
$
462,800
Earnings per share
$9.26
sales are $4,000,000.
2150% times $400,000
3$1,000,000 x 11% = $110,000
PROBLEM 4-7
Total revenues from regular operations
$
832,000
Total expenses from regular operations
776,000
Income from operations
56,000
Extraordinary gain, net of tax
30,000
Net income
$
86,000
85
Earnings per share:
Before extraordinary items
$56,000/10,000 =
$5.60
Extraordinary gain
$30,000/10,000 =
$3.00
Net income
$86,000/10,000 =
$8.60
PROBLEM 4-8
Victor, Inc.
Partial Income Statement
For the Year Ended December 31, 2012
Income from continuing operations, unadjusted
$
400,000
Adjustments:
Settlement of lawsuit
(10,000)
Gain on sale of securities
30,000
Income from continuing operations, adjusted, before tax
$
420,000
Income tax (30%)
(126,000)
Income from continuing operations
$
294,000
Discontinued operations:
Loss on operations of consumer products division
$
60,000
Loss from disposal of assets
90,000
$
150,000
Tax effect (30%)
45,000
Loss from discontinued operations
(105,000)
Income before extraordinary item
$
189,000
Extraordinary item:
Loss from hailstorm
$
20,000
Tax effect (30%)
6,000
(14,000)
Income before cumulative change in accounting principle
$
175,000
Cumulative change in accounting principle from average
cost to FIFO
$
30,000
Tax effect (30%)
(9,000)
Increase in income from change in accounting principle
21,000
Net income
$
196,000
Earnings per share: (100,000 shares outstanding)
Income from continuing operations
$
2.94
Discontinued operations
(1.05)
Extraordinary loss
(0.14)
Cumulative effect of a change in accounting principle
0.21
Net income
$
1.96
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PROBLEM 4-9
a.
A
h.
B
p.
A
b.
A
i.
C
q.
A
c.
A
j.
B
r.
A
d.
B
k.
B
s.
A
e.
B
l.
B
t.
B
f.
A
m.
A
u.
B
g.
A
n.
B
v.
A
o.
B
PROBLEM 4-10
a.
C
h.
B
o.
A
b.
B
i.
B
p.
B
c.
A
j.
A
q.
A
d.
B
k.
B
r.
B
e.
A
l.
A
f.
B
m.
B
g.
C
n.
B
PROBLEM 4-11
a. Net income
$
20,000
Plus: Extraordinary loss from flood
120,000
$
140,000
b. $60,000
PROBLEM 4-12
c.
$
94,000
–
30,000
–
50,000
+
25,000
$
39,000