EXERCISE 4.7 (30–40 minutes)
(a) WEATHERSPOON SHOE
Statement of Comprehensive Income
For the Year Ended December 31, 2019
Net sales …………………………………………………..
£980,000
Cost of goods sold ……………………………………
516,000
Gross profit ………………………………………………
464,000
Selling expenses ……………………………………….
Administrative expenses …………………………...
321,000
Other income and expense
Rent revenue …………………………………………
Loss on sale of plant assets …………………..
14,000
Income from operations …………………………….
157,000
Interest expense ……………………………………….
18,000
Income before income tax ………………………….
139,000
Income tax ………………………………………………..
30,600
Net income ……………………………………………….
108,400
Other Comprehensive income
Unrealized gain on securities, net of tax ….
31,000
Comprehensive income …………………………….
£139,400
Earnings per share (£108,400 ÷ 20,000) ………
EXERCISE 4.7 (Continued)
(b) WEATHERSPOON SHOE
Income Statement
For the Year Ended December 31, 2019
Net sales ……………………………………………………
£980,000
Cost of goods sold …………………………………….
516,000
Gross profit ……………………………………………….
Administrative expenses …………………………….
321,000
Other income and expense
Rent revenue ………………………………………..
29,000
Loss on sale of plant assets ………………….
14,000
Income from operations ……………………………..
Interest expense …………………………………………
18,000
Income before income tax …………………………..
Income tax …………………………………………………
30,600
WEATHERSPOON SHOE
Comprehensive Income Statement
For the Year Ended December 31, 2019
Net income ………………………………………………..
£108,400
Other comprehensive income
Unrealized gain on securities, net of tax …..
31,000
Comprehensive income ………………………………
£139,400
EXERCISE 4.8 (15–20 minutes)
(a) Net sales …………………………………………………………….. € 540,000
Less: Cost of goods sold …………………………………….. (260,000)
(b) Income before income tax ……………………………………. €100,000*
Income tax (€100,000 X .30) ………………………………….. 30,000
Income from continuing operations………………………. 70,000
Discontinued operations, less applicable
EXERCISE 4.9 (30–35 minutes)
(a) TAO LTD
Income Statement
For the Year Ended December 31, 2019
Sales
Net sales …………………………..…………………………..
HK$1,200,000
Cost of goods sold …………………………..……………….
780,000
Gross profit …………………………………………….
420,000
Selling expenses ……………………………………………….
HK$65,000
Administrative expenses …………………………..
48,000
113,000
Other income and expense
Dividend revenue ………………………………………………..
20,000
Interest revenue ………………………………………………….
Income from operations …………………………..
254,000
Interest expense …………………………………………………….
50,000
Income before income tax …………………………..
Income tax …………………………..…………………………..
69,360
Net income ……………………………………………………….
HK$ 134,640
Earnings per share
EXERCISE 4.9 (Continued)
(b) TAO LTD
Retained Earnings Statement
For the Year Ended December 31, 2019
Retained earnings, Jan. 1, as reported …………………………..
HK$ 980,000
period (depreciation error) (net of HK$13,600 tax) ……………………
Retained earnings, Jan. 1, as adjusted …………………………..
Add: Net income ……………………………………………………….
Less: Dividends declared ……………………………………………………….
Correction for overstatement of net income in prior
EXERCISE 4.10 (20–25 minutes)
Computation of net income:
2019 net income after tax …………………………..
R$33,000,000
2019 net income before tax
[R$33,000,000 ÷ (1 – .20)] …………………………..
Add back discontinued operations loss …………………………..
Income before income tax …………………………..
Income taxes (20% X R$53,250,000) …………………………..
Income from continuing operations …………………………..
Discontinued operations:
Loss from discontinued operations …………………………..
Less: Applicable income tax reduction …………………………..
EXERCISE 4.10 (Continued)
Net income ………………………………………………………………………..
R$33,000,000
Less: Provision for preference dividends
Income available to ordinary shareholders ………………………….
Ordinary shares ……………………………………………………….
Income statement presentation
Earnings per share:
Income from continuing operations …………………………..
R$4.23a
Discontinued operations, net of tax …………………………..
EXERCISE 4.11 (20–25 minutes)
WOODS CORPORATION
Income Statement
For the Year Ended December 31, 2019
Net sales(a) ………………………………………………………
$4,062,000
Cost of goods sold(b) …………………………..……………
2,665,000
Gross profit ………………………………………………..
1,397,000
Selling expenses(c) …………………………………………..
$636,000
Administrative expenses(d) ……………………………….
491,000
1,127,000
Other income and expense
Rent revenue …………………………………………………..
240,000
Income from operations……………………………………
510,000
Interest expense ………………………………………………
176,000
Income before income tax ………………………………..
Income tax ($334,000 X .30) …………………………
100,200
Income from continuing operations ………………….
Discontinued operations
Loss on sale of division ……………………………………
Less: Applicable income tax ………………………
18,000
(42,000)
Net income ………………………………………………………
Earnings per share
($900,000 ÷ $10 par value = 90,000 shares)
Income from continuing operations ($233,800 ÷ 90,000) ……
$2.60*
Discontinued operations, net of tax …………………………………
(0.47)*
Net income …………………………………………………………………….
$2.13
*Rounded
Supporting computations
(a) Net sales:
EXERCISE 4.11 (Continued)
(c) Selling expenses:
EXERCISE 4.12 (20–25 minutes)
(a) McENTIRE CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2019
Balance, January 1, as reported ……………………………………….
$225,000*
Correction for depreciation error (net of $5,000 tax) ………….
(20,000)
inventory methods (net of $9,000 tax) …………………………
Balance, January 1, as adjusted ……………………………………….
Add: Net income ……………………………………………………….
Less: Dividends declared ……………………………………………….
(b) Total retained earnings would still be reported as $245,000. A restriction
does not affect total retained earnings; it merely labels part of the retained
earnings as being unavailable for dividend distribution. Retained earnings
would be reported as follows:
Retained earnings:
Appropriated ……………………………………………..
Unappropriated ………………………………………….
EXERCISE 4.13 (15–20 minutes)
Net income:
Income before income tax …………………………..
€21,650,000
Income tax (35% X €21,650,000) …………………………..
7,577,500
Income from continuing operations …………………………..
Discontinued operations
Loss before income tax…………………………..
Less: Applicable income tax (35%) …………………………..
Preference dividends declared: …………………………..
€ 860,000
Weighted average shares outstanding …………………………..
4,000,000
Earnings per share
Income from continuing operations …………………………..
€3.30*
Discontinued operations, net of tax …………………………..
EXERCISE 4.14 (15–20 minutes)
(a) 2019
Income before income tax …………………………. $460,000
(b) Cumulative effect for years prior to 2019:
Year
Weighted
Average
FIFO
Difference
Tax Rate
(35%)
Net Effect
$395,000
390,000
$19,250
(c)
2019
2018
2017
Income before income tax
$460,000
$420,000
$395,000
Income tax (35%)
Net income
$299,000
$273,000
$256,750
EXERCISE 4.15 (15–20 minutes)
GAERTNER AG
Income Statement
For the Year Ended December 31, 2019
Sales ………………………………………………………………………………
€1,200,000
Cost of goods sold ………………………………………………………….
Gross profit …………………………………………………………………….
Selling and administrative expenses ………………………………..
Net income ……………………………………………………………………..
€ 160,000
Comprehensive Income Statement
Net income ……………………………………………………………………..
€ 160,000
Unrealized holding gain …………………………………………………..
Comprehensive income …………………………………………………..
€ 175,000
EXERCISE 4.16 (15–20 minutes)
BRYANT PLC
Statement of Changes in Equity
For the Year Ended December 31, 2019
Share Capital—
Ordinary
Retained
Earnings
Accumulated
other
Comprehensive
Income
Total
Equity
Beginning balance
£350,000
£ 90,000
£80,000
£520,000
Total comprehensive
income
170,000*
170,000
Dividends
EXERCISE 4.17 (30–35 minutes)
(a) VEGA SA
Statement of Comprehensive Income
For the Year Ended December 31, 2019
Sales ………………………………………………………………………………..
R$1,700,000
Cost of goods sold ……………………………………………………….
850,000
Gross profit ……………………………………………………….
Selling expenses ……………………………………………………….
Administrative expenses …………………………………………………..
Other income and expense
Gain on sale of plant assets …………………………..
Rent revenue …………………………………………………
Loss on impairment of land…………………………..
EXERCISE 4.17 (Continued)
Income before income tax ………………………………………
385,000
Income tax ……………………………………………………….
119,000
Income from continuing operations ………………………..
266,000
Discontinued operations
Loss on discontinued operations ……………………
R$ 75,000
Less: Applicable income tax reduction ………………
Net income ……………………………………………………….
216,500
Other comprehensive income
Unrealized holding gain …………………………..
Earnings per share:
(R$266,000 ÷ 100,000) …………………………………………………
Loss on discontinued operations, net of tax ……………………
Income from continuing operations
(b) VEGA SA
Retained Earnings Statement
For the Year Ended December 31, 2019
Retained earnings, January 1 …………………………………………………
R$600,000
Add: Net income ……………………………………………………….
216,500
816,500
Less: Dividends declared …………………………..………………………….
150,000
EXERCISE 4.18 (10–15 minutes)
HASBRO INC.
Statement of Changes in Equity
For the Year Ended December 31, 2019
Share
Capital—
Ordinary
Retained Earnings
Accumulated
other
Comprehensive
Income
Total Equity
Beginning
balance
$300,000
$20,000
$50,000
$370,000
Capital shares
30,000
30,000
100,000
Dividends
Ending balance
Total
TIME AND PURPOSE OF PROBLEMS
Problem 4.1 (Time 5–10 minutes)
Purpose––to provide the student with an opportunity to indicate where various transactions would be
reported on the Statement of Comprehensive Income or the Statement of Retained Earnings.
Problem 4.2 (Time 30–35 minutes)
Problem 4.3 (Time 25–30 minutes)
Problem 4.4 (Time 30–40 minutes)
Problem 4.5 (Time 30–40 minutes)
Purpose—to provide the student with the opportunity to prepare an income statement and a retained
earnings statement from the same underlying information. A substantial number of operating expenses
must be reported in this problem unlike Problem 4.1. As a consequence, the problem is time-consuming.
Problem 4.6 (Time 20–25 minutes)
Purpose—to provide the student with a problem on the income statement treatment of (1) an
Problem 4.7 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare a retained earnings statement. A number
Problem 4.8 (Time 25–35 minutes)
SOLUTIONS TO PROBLEMS
PROBLEM 4.1
1. E
2. C
PROBLEM 4.2
DICKINSON AG
Income Statement
For the Year Ended December 31, 2019
Sales ………………………………………………………………………
€25,000,000
Cost of goods sold ………………………………………………….
16,000,000
Gross profit ……………………………………………………….
9,000,000
Selling and administrative expenses ………………………..
4,700,000
Other income and expense
Gain on the sale of investments ……………………..
Loss due to flood damage
Write-off of goodwill ………………………………………
Income from operations …………………………………………..
3,200,000
Interest expense ……………………………………………………..
70,000
Income before income tax ……………………………………….
3,130,000
Income tax ……………………………………………………….
1,244,000
Income from continuing operations ………………………….
1,886,000
Discontinued operations
Loss on operations, net of tax ………………………..
Loss on disposal, net of tax …………………………..
(530,000)
Net income ……………………………………………………….
PROBLEM 4.2 (Continued)
Earnings per share:
Income from continuing operations ………………..
€3.61a
Discontinued operations
Loss on operations, net of tax ………………..
€(0.18)
Loss on disposal, net of tax ……………………
(0.88)
Net income …………………………………………………….
€2.55b
DICKINSON AG
Retained Earnings Statement
For the Year Ended December 31, 2019
Retained earnings, January 1 …………………………..
€ 980,000
Add: Net income …………………………………………..
1,356,000
2,336,000
Less: Dividends
PROBLEM 4.3
THOMPSON LTD
Income Statement
For the Year Ended December 31, 2019
Net sales (£1,100,000 – £14,500 – £17,500) …………..
£1,068,000
Cost of goods sold* …………………………………………..
645,000
Gross profit ………………………………………………………
423,000
Selling expenses ……………………………………………….
£232,000
Administrative expenses ……………………………………
99,000
Other income and expense
Gain on sale of land …………………………………..
Rent revenue …………………………………………….
48,000
Income before income tax ………………………………….
140,000
53,900
*Cost of goods sold: Can be verified as follows:
Merchandise inventory, Jan. 1 …………………………..
£ 89,000
Purchases ……………………………………………………….
£610,000
Less: Purchase discounts ……………………………….
10,000
Net purchases ………………………………………………….
Add: Freight-in …………………………..…………………..
20,000
620,000
Merchandise available for sale ………………………….
Less: Merchandise inventory, Dec. 31 ………………
64,000
PROBLEM 4.3 (Continued)
THOMPSON LTD
Retained Earnings Statement
For the Year Ended December 31, 2019
Retained earnings, January 1 …………………………………………
£160,000
Add: Net income ……………………………………………………….
86,100
Less: Cash dividends …………………………..………………………
45,000
PROBLEM 4.4
MAHER AG
Income Statement (Partial)
For the Year Ended December 31, 2019
Income before income tax ……………………………………..
€748,500(a)
Income tax (€748,500 X .30) …………………………..
224,550
Income from continuing operations ………………………..
Discontinued operations
Loss from disposal of recreational division …..
Less: Applicable income tax reduction …………
Net income ……………………………………………………………
Earnings per share:
Income from continuing operations ………………
€4.37*
Discontinued operations, net of tax ………………