CHAPTER 4
SOLUTIONS TO B EXERCISES
E4-1B (18–20 minutes)
Computation of net income
Change in assets:
$252,800 + $144,000 + $406,400 – $150,400 = $652,800 Increase
Change in liabilities:
$ 262,400 – $163,200 = 99,200 Increase
$553,600 Increase
Change in stockholders’ equity accounted
for as follows:
Net increase ………………………………………………….
Increase in common stock ……………………..
Increase in additional paid-in capital ………
dividend declaration …………………………..
(60,800)
Net increase accounted for …………………………….
income ………………………………………………………
E4-2B (25–35 minutes)
Sales revenue …………………………………………………
$536,000
Less:
Cost of goods sold …………………………..……..
$363,000
Selling and administrative expenses ………..
110,500
473,500
(a)
Income form operations
Interest expense ……………………………………..
Loss on sale of investments …………………….
(b)
Net income ……………………………………………………..
Allocation to non-controlling interest ……….
controlling shareholders ………………………………….
E4-3B (25–35 minutes)
(a)
Total net revenue:
Sales ………………………………………………………
$312,000
Less: Sales discounts …………………………….
$ 6,240
Sales returns ………………………………..
9,920
Net sales …………………………………………………
Dividend revenue …………………………………….
Rental revenue ………………………………………..
Total net revenue …………………………….
(b)
Net income:
Total net revenue (from a) ………………………..
$357,840
Expenses:
Cost of goods sold ……………………………..
Selling expenses ………………………………..
79,520
Administrative expenses …………………….
66,000
Interest expense …………………………………
Total expenses ……………………………..
Income before taxes …………………………..……
54,640
Income taxes …………………………..………………
Net income …………………………………………
$ 29,840
(c)
Dividends declared:
Ending retained earnings …………………………
$107,200
Beginning retained earnings …………………….
91,520
Net increase …………………………………………………….
Less: Net income ……………………………………………
(29,840)
Dividends declared ………………………………………….
$ 14,160
(d)
Net income (from b above) ……………………………….
$ 29,840
Allocation to non-controlling interest ………………..
E4-3B (Continued)
ALTERNATE SOLUTION for part (c)
Beginning retained earnings …………………………...
$ 91,520
Add: Net income …………………………………………….
29,840
Deduct: Dividends declared…………………………….
?
Ending retained earnings …………………………………
$107,200
Dividends declared must be $14,160
($121,360 – $107,200)
E4-4B (20–25 minutes)
LEON PAUL INC.
Income Statement
For Year Ended December 31, 2014
Sales …………………………………………………………………………
$2,500,000
Less: Sales discounts ……………………………………………….
34,000
Net sales …………………………………………………………
Cost of goods sold……………………………………………
Selling expenses ………………………………………………
Interest expense ……………………………………………….
40,000
Total expenses …………………………………………
Income taxes ……………………………………………………
127,800
Determination of amounts:
Administrative expenses
=
20% of cost of good sold
=
20% of $1,000,000
=
$200,000
Gross sales X 8%
=
administrative expenses = $200,000
Gross sales
=
$2,500,000
Selling expenses
=
4 times administrative expenses.
(operating expenses consist of selling
and administrative expenses; since
selling expenses are 4/5 of operating
expenses, selling expenses are 4
times administrative expenses.)
=
4 X $200,000
=
$800,000
Per share $14.91 ($298,200 ÷ 20,000)
E4-5B (30–35 minutes)
(a) Multiple-Step Form
SAGHIR COMPANY
Income Statement
For the Year Ended December 31, 2014
(In thousands, except earnings per share)
Sales ………………………………………………..
$135,100
Cost of goods sold …………………………….
84,798
Gross profit ………………………………….
Operating Expenses
Selling expenses
Sales commissions …………………
Depr. of sales equipment …………
Transportation-out ………………….
Administrative expenses
Officers’ salaries …………………….
Depr. of office furn. and equip. …
Income from operations ……..
13,888
Other Revenues and Gains
Rental revenue …………………………….
24,122
38,010
Other Expenses and Losses
Interest expense …………………………..
2,604
Income before taxes…………………………..
Income taxes ……………………………….
12,698
Net income ………………………………………..
Earnings per share ($22,708 ÷ 40,550) …
E4-5B (Continued)
(b) Single-Step Form
SAGHIR COMPANY
Income Statement
For the Year Ended December 31, 2014
(In thousands, except earnings per share)
Revenues
Net sales ……………………………………………
Rental revenue …………………………………..
Total revenues………………………………
Expenses
Cost of goods sold …………………………….
84,798
Selling expenses ………………………………..
Administrative expenses …………………….
Interest expense ………………………………..
Total expenses ……………………………..
Income before taxes ………………………………..
35,406
Income taxes …………………………………………..
(c) Single-step:
1. Simplicity and conciseness.
2. Probably better understood by user.
Multiple-step:
1. Provides more information through segregation of operating and
nonoperating items.
2. Expenses are matched with related revenue.
E4-6B (30–35 minutes)
SCHIMANK CORP.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
Sales ……………………………………………………………..
$1,932,000
Less: Sales returns and allowances ………………..
Net sales revenue …………………………………………..
Cost of goods sold
869,400
789,600
Operating Expenses
Selling expenses ………………………………………..
271,600
Admin. and general expenses ……………………..
407,400
Income from operations ……………………………………….
Other Revenues and Gains
Interest revenue ………………………………………….
120,400
502,600
Other Expenses and Losses
Interest expense …………………………………………
84,000
Income before taxes and extraordinary item …………
Income taxes ($418,600 X .34)………………………
142,324
Income before extraordinary item ………………………..
276,276
Extraordinary item
Loss from earthquake damage …………………….
($210,000 X .34) ………………………………………..
138,600
Net income …………………………………………………………
$ 137,676
Per share of common stock:
($276,276 ÷ 100,000) …………………………………
Extraordinary item (net of tax) ……………………..
E4-7B (30–40 minutes)
(a) Multiple-Step Form
TABEL SHOE CO.
Income Statement
For the Year Ended December 31, 2014
Net sales ……………………………………….
$2,940,000
Cost of goods sold ………………………..
1,488,000
Gross profit …………………………………..
1,452,000
Operating Expenses
Selling expenses
Wages and salaries …………….
Materials and supplies ………..
Depr. exp. (70% X $19,000) …..
Administrative expenses
Wages and salaries …………….
Depr. exp. (30% X $19,000) …..
Other admin. expenses ……….
1,155,000
Income from operations …………………
Other Revenues and Gains
Rental revenue …………………………
87,000
384,000
Other Expenses and Losses
Interest expense ………………………
54,000
Income before income tax ……………..
Income tax ……………………………….
112,200
E4-7B (Continued)
(b) Single-Step Form
TABEL SHOE CO.
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales …………………………………………….
$2,940,000
Rental revenue ……………………………………
87,000
Total revenues ……………………………….
3,027,000
Expenses
Cost of goods sold ……………………………..
Selling expenses …………………………………
Administrative expenses ……………………..
621,300
Interest expense …………………………………
54,000
Total expenses ………………………………
Income before taxes …………………………………
330,000
Income taxes ………………………………………
112,200
Net income ………………………………………………
$ 217,800
(c)
Single-step:
1. Simplicity and conciseness.
2. Probably better understood by user.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of one expense over another.
Multiple-step:
1. Provides more information through segregation of operating and
nonoperating items.
2. Expenses are matched with related revenue.
E4-8B (15–20 minutes)
(a) Net sales …………………………..………………………………………… $1,350,000
Less: Cost of goods sold …………………………………………….. (525,000)
(b) Income from continuing operations before income tax ….. $375,000*
Income tax ($375,000 X .30) ……………………………………….. 112,500
Earnings per share:
Income from continuing operations
E4-9B (30–35 minutes)
(a) TRIEU CORP.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
Net sales ………………………………………………….
$2,600,000
Cost of goods sold …………………………………..
Gross profit ……………………………………
Operating Expenses
Selling expenses ………………………………….
$130,000
Administrative expenses ………………………
Income from operations …………………………………
Other Revenues and Gains
Dividend revenue …………………………………
40,000
Interest revenue ……………………………………
14,000
54,000
868,000
Other Expenses and Losses
obsolescence…………………………………….
Income taxes ……………………………………….
240,720
Income before extraordinary item …………………..
467,280
Extraordinary item
Casualty loss …………………………..…..
Less: Applicable tax reduction …….
Write-off of inventory due to
Per share of common stock:
($467,280 ÷ 60,000) …………………………….
Extraordinary item (net of tax) ……………….
E4-9B (Continued)
(b) TRIEU CORP.
Retained Earnings Statement
For the Year Ended December 31, 2014
Balance, Jan. 1, as reported ……………………………………………………..
$1,960,000
Correction for overstatement of net income in prior period
E4-10B (20–25 minutes)
Computation of net income:
2014 net income after tax ………………………….
$ 6,600,000
2014 net income before tax
Add back: Major casualty loss ………………….
3,600,000
Income from operations ……………………… ……………………….
Income before extraordinary item ……………..
Extraordinary item:
Less: Applicable income tax reduction …
2,376,000
Net income ……………………………………………………
$ 6,600,000
Less: Provision for preferred dividends
Income available for common …………………..
E4-10B (Continued)
Income statement presentation
Per share of common stock:
E4-11B (20–25 minutes)
Vu CORPORATION
Income Statement
For the Year Ended December 31, 2014
Net sales …………………………………………………………
$2,081,000
Cost of goods sold ………………………………………….
1,332,500
Gross profit ……………………………………………….
748,500
Selling expenses ……………………………………………..
$318,000
Administrative expenses ………………………………….
563,500
Income from operations ……………………………..
185,000
Other revenue …………………………………………………
Other expense …………………………………………………
32,000
Income before taxes
217,000
Income taxes ($217,000 X .34) ……………………..
Income before extraordinary item …………………….
Extraordinary loss, net of $11,900 taxes ……………
Earnings per share ($450,000 ÷ $10 par value = 45,000 shares)
Income before extraordinary item ($143,220 ÷ 45,000) ….
$3.18
E4-11B (Continued)
Supporting computations:
Net sales:
Cost of goods sold:
Selling expenses:
Administrative expenses:
E4-12B (20–25 minutes)
(a) JASON WOO CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Balance, January 1, as reported …………………………….
$ 900,000*
Cumulative effect of change in inventory methods
(net of $56,000 tax) …………………………..………………..
(84,000)
Add: Net income ………………………………………………….
E4-12B (Continued)
(b) Total retained earnings would still be reported as $932,000. A restriction
does not affect total retained earnings; it merely labels part of the retained
E4-13B (15–20 minutes)
Net income:
Income from continuing operations
before income tax ……………………………………………………….….
$61,500,000
Income tax (40% X $161,500,000) …………………………………………
Income from continuing operations …………………………………….
Discontinued operations
Gain before income tax …………………………………………………
Less: Applicable income tax (40%) ………………………………..
3,900,000
Net income ………………………………………………………………………..
Preferred dividends declared: ………………………………………………….
$ 2,020,000
Weighted average common shares
outstanding …………………………………………………………………………
4,000,000
Earnings per share
Income from continuing operations …………………………………….
Discontinued operations, net of tax …………………………………….
Net income ………………………………………………………………………..
Retained earnings:
Appropriated ………………………………………………….
Unappropriated ………………………………………………
E4-14B (15–20 minutes)
(a) Depreciation expense for 2014
E4-15B (15–20 minutes)
(a)
ARI CORPORATION
Income Statement and Statement of Comprehensive Income
For the Year Ended December 31, 2014
Sales ……………………………………………………………………………
$6,000,000
Cost of goods sold …………………………..…………………………..
3,750,000
Net income ……………………………………………………….………….
$ 650,000
Unrealized holding gain ………………………………………………..
E4-15B (Continued)
(b)
ARI CORPORATION
Income Statement
For the Year Ended December 31, 2014
Sales …………………………………………………………………………..
$6,000,000
Selling and administrative expenses …………………………….
ARI CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2014
Net income ………………………………………………………………….
$650,000
E4-16B (15–20 minutes)
CALVO CO.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2014
Total
Compre-
hensive
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Common
Stock
Beginning balance
$260,000
$ 45,000
$40,000
$175,000
E4-17B (30–35 minutes)
(a) CANTU INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Sales ……………………………………………………………..
$2,660,000
Rent revenue ………………………………………………….
56,000
Total revenues …………………………………………
2,716,000
Expenses
Cost of goods sold …………………………………..
Selling expenses ……………………………………..
420,000
Administrative expenses ………………………….
336,000
Total expenses ………………………………
Income taxes ……………………………………………..
Income taxes …………………………………………..
261,800
Income from continuing operations ………………..
508,200
Discontinued operations
Loss on discontinued operations ……………..
$105,000
Less: Applicable income tax reduction …….
35,700
69,300
Income before extraordinary items …………………
438,900
Extraordinary items:
Extraordinary gain ……………………………………
Less: Applicable income tax ……………………
45,220
87,780
Extraordinary loss ……………………………………
Less: Applicable income tax reduction …….
28,560
55,440
Per share of common stock:
Income from continuing operations
($508,200 ÷ 100,000) ………………………………
$5.08
Loss on discontinued operations, net of tax ….
Income before extraordinary items
($438,9000 ÷ 100,000) …………………………....
Extraordinary gain, net of tax ……………………
Extraordinary loss, net of tax ……………………
E4-17B (Continued)
(b) CANTU INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2014
Net income …………………………………………………….
$471,240
Other comprehensive income
Unrealized holding gain ……………………………..
(c) CANTU INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, 2014 ………………….
$ 840,000
2014 Net income ……………………………………………..
471,240
Dividends declared …………………………………………
Retained earnings, December 31, 2014 …………….
$1,101,240