CHAPTER 4
SOLUTIONS TO B PROBLEMS
PROBLEM 4-1B
MARLIN COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales revenue …………………………………………………………
$53,000,000
Cost of goods sold ………………………………………………….
33,000,000
Gross profit …………………………………………………………….
20,000,000
Selling and administrative expenses ………………………..
8,900,000
Income from operations…………………………………………..
Other revenues and gains
Interest revenue …………………………………………….
Other expenses and losses
Loss on the sale of investments ……………………..
Write-off of goodwill ………………………………………
2,153,000
income tax …………………………………………………………………..
9,067,000
Income tax ……………………………………………………….…….
3,650,000
Income from continuing operations …………………………
5,417,000
Discontinued operations
Loss on operations, net of tax ………………………..
Gain on disposal, net of tax …………………………...
(208,000)
Income before extraordinary item …………………………….
damage, net of tax ……………………………………………….
Earnings per share:
Income from continuing operations …………………
$ 7.56a
Discontinued operations
Loss on operations, net of tax …………………
Gain on disposal, net of tax …………………….
Income before extraordinary item …………………….
Extraordinary loss, net of tax …………………………..
PROBLEM 4-1B (Continued)
MARLIN COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 …………………………..
Add: Net income …………………………………………..
4,109,000
6,359,000
Less: Dividends
Preferred stock ……………………………………..
$ 125,000
Common stock ……………………………………..
350,000
475,000
Retained earnings, December 31 ……………………..
$ 5,884,000
PROBLEM 4-2B
DUNN CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales ($2,250,000 – $21,600 – $9,400) …….
Rent revenue …………………………………………….
Expenses
Cost of goods sold* …………………………………..
1,461,000
Selling expenses ……………………………………….
Administrative expenses …………………………...
Loss on sale of land ………………………………….
Total expenses ………………………………….
Income before income tax …………………………………..
359,000
Income tax ………………………………………………..
91,900
Net income …………………………..…………………………….
$ 267,100
Earnings per share ($86,100 ÷ 100,000) ………………..
$2.67
*Cost of goods sold: Can be verified as follows:
Inventory, Jan. 1 ………………………………………………
Less: Purchase discounts ……………………………….
Net purchases………………………………………………….
1,414,000
Inventory available for sale ………………………………
Less: Inventory, Dec. 31 ………………………………….
PROBLEM 4-2B (Continued)
DUNN CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 …………………………………………
$ 132,500
Less: Cash dividends ……………………………………………………
PROBLEM 4-3B
VANPOP INC.
Income Statement (Partial)
For the Year Ended December 31, 2014
Income from continuing operations
before income tax ……………………………………………….
$596,000(a)
Income tax …………………………………………………..
151,800(b)
Income from continuing operations ……………………….
Discontinued operations
Less: Applicable income tax reduction …………
Income before extraordinary item …………………………..
Extraordinary item:
Major casualty loss ………………………………………
Less: Applicable income tax reduction …………
Per share of common stock:
Income from continuing operations ………………
$1.77
Discontinued operations, net of tax ………………
(0.73)*
Income before extraordinary items ……………….
Extraordinary item, net of tax ……………………….
(0.39)
*Rounded
(a)Computation of income from cont. operations before taxes:
As previously stated …………………………………………
$463,000
Gain on sale of securities …………………………………
40,000
policy ($500,000 – $410,000) ………………………….
As restated………………………………………………………….
PROBLEM 4-3B (Continued)
(b)Computation of income tax:
Income from continuing operations before taxes ……….
$596,000
Nontaxable income (gain on life insurance) ……………….
(90,000)
Taxable income………………………………………………………..
Tax rate …………………………………………………………………..
PROBLEM 4-4B
(a) CASTLE CORPORATION
Income Statement
For the Year Ended June 30, 2014
Sales Revenue
Sales revenue …………………………..…………………………
$2,100,500
Less: Sales discounts …………………………………………
Sales returns and allowances …………………….
Net sales …………………………………………………………….
Cost of goods sold …………………………..……………………….
Gross profit ……………………………………………………………..
Operating Expenses
Selling expenses
Sales commissions ………………………………………….
135,800
Salaries and wages expense. …………………………...
Travel expense ………………………………………………..
Freight-out ………………………………………………………
Entertainment expense …………………………………….
Telephone and Internet expense ……………………….
Bad debt expense…………………………………………….
Depreciation expense ………………………………………
Maintenance and repairs expense …………………….
Administrative Expenses
Maintenance and repairs expense ……………..
4,860
Property tax expense …………………………………..
12,900
Depreciation expense ……………………………….
8,680
Supplies expense ……………………………………..
2,900
Telephone and internet expense ………………..
Miscellaneous office expenses ………………….
Income from operations ……………………………….
PROBLEM 4-4B (Continued)
Other Revenues and Gains
Other Expenses and Losses
Interest expense ……………………………………….
37,500
Income before income tax …………………………….
Income tax ……………………………………………….
68,000
*Rounded
CASTLE CORPORATION
Retained Earnings Statement
For the Year Ended June 30, 2014
Retained earnings, July 1, 2013, as reported …………..
$468,000
net of tax …………………………………………………………..
499,000
Dividends declared on common stock …………..
60,000
PROBLEM 4-4B (Continued)
(b) CASTLE CORPORATION
Income Statement
For the Year Ended June 30, 2014
Revenues
Net sales …………………………………………………………….
$2,050,950
Dividend revenue ………………………………………………..
21,000
Expenses
Cost of goods sold ………………………………………………
1,490,300
Selling expenses …………………………………………………
Administrative expenses ……………………………………..
Interest expense ………………………………………………….
37,500
Total expenses ……………………………………………
Income before income tax ……………………………………………..
Income tax ………………………………………………………….
68,000
CASTLE CORPORATION
Retained Earnings Statement
For the Year Ended June 30, 2014
Retained earnings, July 1, 2013, as reported …………….
$468,000
Correction of depreciation overstatement,
net of tax ……………………………………………………….……
31,000
Retained earnings, July 1, 2013 as adjusted …………….
Add: Net income ……………………………………………………
Dividends declared on preferred stock …………..
Dividends declared on common stock ……………
PROBLEM 4-5B
1. The usual but infrequently occurring charge of $11,000,000 should be
disclosed separately, assuming it is material. This charge is shown
above income before extraordinary items and would not be reported net
2. The extraordinary item of $8,500,000 should be reported net of tax in a
separate section for extraordinary items. An adjustment should be made
to income taxes to report this amount at $40,200,000. The $3,200,000 tax
3. The adjustment required for correction of an error is inappropriately
labeled and also should not be reported in the retained earnings
statement. Changes in estimate should be handled in current and future
4. Earnings per share should be reported on the face of the income
statement and not in the notes to the financial statements. Because
PROBLEM 4-6B
(a) COOPER CORP.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, as reported …………………………………
$616,050
Correction of error from prior period (net of tax) ………………………..
49,700
Retained earnings, January 1, as adjusted …………………………………
Add: Net income …………………………………………………………………….
(b) 1. Gain on sale of investments—body of income statement. This gain
should not be shown net of tax on the income statement.
2. Refund on litigation with government—body of income statement,
possibly unusual item. This refund should not be shown net of tax
PROBLEM 4-7B
RAFTER CORP.
Income Statement (Partial)
For the Year Ended December 31, 2014
Income from continuing operations
before income tax ………………………………
$2,686,000*
Income tax ……………………………………
805,800**
Income from continuing operations ………..
1,880,200
Discontinued operations
discontinued subsidiary …………….
reduction ……………………..
$ 273,000
Loss from disposal of subsidiary ……..
reduction ……………………..
Income before extraordinary item …………..
Extraordinary item:
Loss on condemnation ………………….
Net income ……………………………………………
Per share of common stock:
Income from continuing operations …………………………….
$4.70
Discontinued operations, net of tax …………………………....
Income before extraordinary item …………………………..…..
Extraordinary item, net of tax ……………………………………..
Net income ($1,529,200 ÷ 400,000) ………………………………
PROBLEM 4-7B (Continued)
*Computation of income from continuing operations
before income tax:
Restated
**Computation of income tax expense:
$2,686,000 X 0.30 = $805,800