4-21
EXERCISE 4-3 (20–25 minutes)
DUNBAR INC.
Income Statement
For Year Ended December 31, 2012
Revenues
Net sales ($1,125,000(b) – $17,000) ……………………
$1,108,000
Expenses
Earnings per share (d) ……………………………………………..
$3.22*
*Rounded
Determination of amounts
(a) Administrative expenses
=
18% of cost of good sold
=
18% of $500,000
=
$90,000
(b) Gross sales X 8%
=
administrative expenses
=
$90,000 ÷ 8%
=
$1,125,000
(c) Selling expenses
=
four 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 $90,000
=
$360,000
(d) Earnings per share $3.22 ($96,600 ÷ 30,000)
Note: An alternative income statement format is to show income tax as part
of expenses, and not as a separate item. In this case, total expenses are
$1,011,400.
Cost of goods sold …………………………………………
Selling expenses …………………………………………….
Administrative expenses …………………………………
Interest expense …………………………………………….
Total expenses ……………………………………….
970,000
Income before income tax ………………………………………..
Income tax ……………………………………………………..
41,400
EXERCISE 4-4 (30–35 minutes)
Sales revenue …………………………………………….
$96,500
Cost of goods sold ……………………………………..
63,570
Gross profit ………………………………………………..
32,930
Sales commissions ………………………….
Depr. of sales equipment ………………….
Transportation-out …………………………..
$17,150
Administrative expenses
Officers’ salaries ………………………………
Income from operations ………………
Other Revenues and Gains
Rent revenue …………………………………………
17,230
Other Expenses and Losses
Interest expense ……………………………………
1,860
Income before income tax …………………………..
22,290
Income tax …………………………………………….
7,580
4-23
EXERCISE 4-4 (Continued)
(b) Single-Step Form
WEBSTER COMPANY
Income Statement
For the Year Ended December 31, 2012
(In thousands, except earnings per share)
Revenues
Sales revenue ……………………………………………………….
$ 96,500
Rental revenue ……………………………………………………….
17,230
Total revenues…………………………………………………….
113,730
Income before income tax ………………………………………………
22,290
Income tax …………………………………………………………………….
7,580
Net income ……………………………………………………….
$ 14,710
Earnings per share ……………………………………………………….
$0.36
Expenses
Cost of goods sold …………………………………………………..
63,570
Selling expenses ………………………………………………………
17,150
Administrative expenses …………………………………………..
Interest expense ………………………………………………………
1,860
Total expenses ……………………………………………………
91,440
EXERCISE 4-4 (Continued)
Multiple-step:
1. Provides more information through segregation of operating and
nonoperating items.
EXERCISE 4-5 (30–35 minutes)
PARNEVIK CORP.
Income Statement
For the Year Ended December 31, 2012
Sales Revenue
Sales revenue …………………………………………………..
$1,280,000
Net sales …………………………………………………………..
Income from operations ………………………………………….
4-25
EXERCISE 4-5 (Continued)
Other Revenues and Gains
Interest revenue ……………………………………………….
86,000
Other Expenses and Losses
Interest expense ………………………………………………
60,000
*Rounded
Income before tax and extraordinary item ………………..
Income tax ($199,000 X .34) ………………………………
67,660
Income before extraordinary item …………………………….
Extraordinary item—loss from earthquake damage …….
Less: Applicable tax reduction ($120,000 X .34) ….
79,200
Net income ……………………………………………………………..
Per share of common stock:
Extraordinary item (net of tax) …………………………….
EXERCISE 4-6 (30–40 minutes)
(a) Multiple-Step Form
WEATHERSPOON SHOE CO.
Income Statement
For the Year Ended December 31, 2012
Net sales ……………………………………………….
$980,000
Cost of goods sold …………………………..
516,000
Gross profit …………………………………………..
464,000
Salaries and wages expense ………..
Depr. exp. (70% X $65,000) …………..
Supplies ……………………………………..
Administrative expenses
Salaries and wages expense ………..
Depr. exp. (30% X $65,000) …………..
Income from operations …………………………
Other Revenues and Gains
Rent revenue ……………………………………
29,000
Other Expenses and Losses
Interest expense …………………………..
18,000
Income before income tax ………………………
Income tax ……………………………………….
30,600
4-27
EXERCISE 4-6 (Continued)
(b) Single-Step Form
WEATHERSPOON SHOE CO.
Income Statement
For the Year Ended December 31, 2012
Revenues
Net sales ……………………………………………………….
$ 980,000
Rent revenue ……………………………………………………….
29,000
Total revenues ………………………………………………..
1,009,000
Income before income tax …………………………..
90,000
Income tax ……………………………………………………….
30,600
Net income ……………………………………………………….
$ 59,400
Earnings per share ($59,400 ÷ 20,000) …………………………
$2.97
Single-step:
Expenses
Cost of goods sold ……………………………………………….
Administrative expenses …………………………..
Selling expenses …………………………..……………………..
Interest expense …………………………………………………..
Total expenses ………………………………………………..
919,000
EXERCISE 4-6 (Continued)
Multiple-step:
1. Provides more information through segregation of operating and
EXERCISE 4-7 (15–20 minutes)
(a) Net sales …………………………………………………………….. $540,000
Less: Cost of goods sold …………………………………….. 260,000
Administrative expenses ……………………………. 100,000
(b) Income from continuing operations
before income tax …………………………..…………………. $100,000*
Income tax ($100,000 X .30) ………………………………….. 30,000
Income from continuing operations ………………………. 70,000
4-29
EXERCISE 4-8 (30–35 minutes)
(a) BROKAW CORP.
Income Statement
For the Year Ended December 31, 2012
Sales Revenue
Net sales ……………………………………………………….
$1,200,000
Cost of goods sold ………………………………………….
780,000
Gross profit ……………………………………………….
420,000
334,000
Other Expenses and Losses
Write-off of inventory due to
obsolescence ……………………………………………….
80,000
Income before income tax and extraordinary
item …………………………………………………………..
254,000
Income tax ………………………………………………………
86,360
Income before extraordinary item …………………………..
167,640
Extraordinary item
Casualty loss …………………………..……………………..
Less: Applicable tax reduction ………………………..
Per share of common stock:
Extraordinary item, net of tax …………………………..
Selling expenses …………………………………………….
Administrative expenses …………………………..
113,000
Income from operations …………………………..……………….
307,000
Other Revenues and Gains
Dividend revenue …………………………………………….
Interest revenue ………………………………………………
27,000
EXERCISE 4-8 (Continued)
(b) BROKAW CORP.
Retained Earnings Statement
For the Year Ended December 31, 2012
Retained earnings, Jan. 1, as reported …………………………..
$ 980,000
Add: Net income ……………………………………………………….
134,640
EXERCISE 4-9 (20–25 minutes)
Computation of net income:
2012 net income after tax ……………………………………………………
$33,000,000
2012 net income before tax
[$33,000,000 ÷ (1 – .34)] …………………………..
Add back major casualty loss …………………………..
Income from operations …………………………..
Income taxes (34% X $62,000,000) …………………………..
Income before extraordinary item …………………………..
40,920,000
Extraordinary item:
Casualty loss ……………………………………………………….
Less: Applicable income tax reduction …………………………..
7,920,000
4-31
EXERCISE 4-9 (Continued)
Net income ………………………………………………………………………..
$33,000,000
Less: Provision for preferred dividends
(6% of $4,500,000) ……………………………………………………….
270,000
Income statement presentation
Per share of common stock:
Income before extraordinary item …………………………..
Extraordinary item, net of tax …………………………..……………
a$40,920,000 – $270,000
=
$4.06*
b($7,920,000)
=
$(0.79*)
10,000,000
10,000,000
Income available to common stockholders ………………………….
Common stock shares ……………………………………………………….
EXERCISE 4-10 (20–25 minutes)
WOODS CORPORATION
Income Statement
For the Year Ended December 31, 2012
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) ……………………………….
1,127,000
Income from operations ………………………………
Other revenue (rent) …………………………………………
Other expense (interest) …………………………..………
64,000
Income before income tax ………………………………..
Income tax ($334,000 X .34) …………………………
113,560
Income before extraordinary item ……………………..
220,440
Extraordinary loss ……………………………………………
$ 60,000
Less: Applicable income tax……………………….
20,400
39,600
Net income ………………………………………………………
$ 180,840
Earnings per share ($900,000 ÷ $10 par value = 90,000 shares)
Income before extraordinary item ($220,440 ÷ 90,000) ……….
Net income ……………………………………………………………………..
*Rounded
Supporting computations
(a) Net sales:
$4,175,000 – $34,000 – $79,000 = $4,062,000
(b) Cost of goods sold:
$535,000 + ($2,786,000 + $72,000 – $27,000 – $15,000) – $686,000 =
$2,665,000
4-33
EXERCISE 4-11 (20–25 minutes)
(a) McENTIRE CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2012
Balance, January 1, as reported ……………………………………….
$225,000*
Correction for depreciation error
(b) Total retained earnings would still be reported as $215,000. 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:
Balance, January 1, as adjusted ………………………………………
Less: Dividends declared ……………………………………………….
EXERCISE 4-12 (15–20 minutes)
Net income:
Income from continuing operations
before income tax ……………………………………………………….
$21,650,000
Income tax (35% X $21,650,000) …………………………..
Income from continuing operations …………………………..
Discontinued operations
Loss before income tax …………………………..
Less: Applicable income tax (35%) …………………………..
Preferred dividends declared: …………………………..
$ 860,000
Weighted average common shares outstanding…………………………..
4,000,000
Earnings per share
Income from continuing operations …………………………..
Discontinued operations, net of tax …………………………..
EXERCISE 4-13 (15–20 minutes)
(a) 2012
Income before income tax ………………………. $460,000
Income tax (35%) ……………………………………. 161,000
Net Income …………………………………………….. $299,000
FIFO
4-35
EXERCISE 4-13 (Continued)
(c)
2012
2011
2010
Income before income tax
$460,000
$420,000
$395,000
EXERCISE 4-14 (15–20 minutes)
ARMSTRONG CORPORATION
Income Statement and Comprehensive Income Statement
For the Year Ended December 31, 2012
Net sales ………………………………………………………………………..
$1,200,000
Cost of goods sold ………………………………………………………….
Gross profit …………………………………………………………………….
Selling and administrative expenses ………………………………..
Net income ……………………………………………………………………..
EXERCISE 4-15 (15–20 minutes)
BRYANT CO.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2012
Total
Compre-
hensive
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Common
Stock
Beginning balance
$520,000
$ 90,000
$80,000
$350,000
Comprehensive income
Unrealized holding loss
Income tax (35%)
Net income
EXERCISE 4-16 (30–35 minutes)
(a) GIBSON INC.
Income Statement
For the Year Ended December 31, 2012
Revenues
Sales revenue ……………………………………………………….
$1,700,000
Rent revenue ……………………………………………………….
40,000
Total revenues …………………………..
1,740,000
Cost of goods sold …………………………………………………..
$ 850,000
Selling expenses …………………………..…………………………
300,000
Administrative expenses …………………………..
240,000
Total expenses …………………………..
Income from continuing operations before
income tax ……………………………………………………….
350,000
Income tax …………………………………………………….
119,000
Income from continuing operations ………………………..
231,000
Discontinued operations
Loss on discontinued operations ……………………
$75,000
Less: Applicable income tax
reduction …………………………………………….
25,500
49,500
Income before extraordinary items ………………………….
Extraordinary items:
Extraordinary gain …………………………………………
Less: Applicable income tax ………………………….
32,300
62,700
244,200
Extraordinary loss …………………………………………
Less: Applicable income tax
4-37
EXERCISE 4-16 (Continued)
Per share of common stock:
Income from continuing operations
($231,000 ÷ 100,000) ……………………………………………………
$2.31
(b) GIBSON INC.
Retained Earnings Statement
For the Year Ended December 31, 2012
Retained earnings, January 1 ………………………………………………….
$600,000
Add: Net income ……………………………………………………….…………
204,600
$804,600
For the Year Ended December 31, 2012
Net income ………………………………………………………………………
Other comprehensive income
Unrealized holding gain ………………………………………………
Income before extraordinary items
($181,500 ÷ 100,000) ……………………………………………………
TIME AND PURPOSE OF PROBLEMS
Problem 4-1 (Time 30–35 minutes)
Purpose—to provide the student with an opportunity to prepare a multi-step income statement and a
retained earnings statement. A number of special items such as loss from discontinued operations,
unusual items, and ordinary gains and losses are presented in the problem for analysis purposes.
Problem 4-2 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to prepare a single-step income statement and a
retained earnings statement. The student must determine through analysis the ending balance in retained
earnings.
Problem 4-3 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to analyze a number of transactions and to prepare a
partial income statement. The problem includes discontinued operations, an extraordinary item, and the
cumulative effect of a change in accounting principle.
Problem 4-4 (Time 45–55 minutes)
Purpose—to provide the student with the opportunity to prepare multiple-step and single-step income
statements 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 and emphasizes the differences between the multiple-step and single-
step income statement.
Problem 4-5 (Time 20–25 minutes)
Purpose—to provide the student with a problem on the income statement treatment of (1) a change that
is usual but infrequently occurring, (2) an extraordinary item and its related tax effect, (3) a correction of
an error, and (4) earnings per share. The student is required not only to identify the proper income
statement treatment but also to provide the rationale for such treatment.
Problem 4-6 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare a retained earnings statement. A number
of special items must be reclassified and reported in the income statement. This problem illustrates the
fact that ending retained earnings is unaffected by the choice of disclosing items in the income
statement or the retained earnings statement, although the income reported would be different.
Problem 4-7 (Time 25–35 minutes)
Purpose—to provide the student with a problem to determine the reporting of several items, which may
get special treatment as irregular items. This is a good problem for a group assignment.
4-39
SOLUTIONS TO PROBLEMS
PROBLEM 4-1
DICKINSON COMPANY
Income Statement
For the Year Ended December 31, 2012
Sales revenue ……………………………………………………….
$25,000,000
income tax …………………………………………………………………..
3,660,000
Income tax ……………………………………………………….…….
1,244,000
Income from continuing operations …………………………
2,416,000
Discontinued operations
Loss on operations, net of tax ………………………..
90,000
Loss on disposal, net of tax …………………………..
Income before extraordinary item …………………………..
1,886,000
Cost of goods sold ………………………………………………….
Gross profit …………………………………………………………….
9,000,000
Income from operations…………………………………………..
4,300,000
Other revenues and gains
Interest revenue …………………………………………….
Gain on the sale of investments ……………………..
Other expenses and losses
Write-off of goodwill ………………………………………
820,000
4-40
PROBLEM 4-1 (Continued)
DICKINSON COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2012
Retained earnings, January 1 …………………………..
$ 980,000
Add: Net income …………………………………………..
1,496,000
Less: Dividends
330,000