EXERCISE 4-3 (25–35 minutes)
(a)
Total net revenue:
Sales revenue
$390,000
Less: Sales discounts
$ 7,800
Sales returns
20,200
Net sales
Dividend revenue
Rent revenue
6,500
(b)
Net income:
Total net revenue (from a)
$447,300
Expenses:
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
12,700
Total expenses
Income before income tax
Income tax
31,000
(c)
Dividends declared:
Ending retained earnings
$134,000
Beginning retained earnings
114,400
Net increase
Less: Net income
EXERCISE 4-3 (Continued)
ALTERNATE SOLUTION
Beginning retained earnings
$114,400
Add: Net income
37,300
151,700
Less: Dividends declared
Dividends declared must be $17,700
($151,700 – $134,000)
Allocation to noncontrolling interest)
$37,300 – $ $17,000 = $ 20,300
EXERCISE 4-4 (20–25 minutes)
LEROI JONES INC.
Income Statement
For Year Ended December 31, 2014
Revenues
Net sales ($1,250,000(b) – $17,000) ……………………
$1,233,000
Expenses
Cost of goods sold………………………………………….
Selling expenses …………………………………………….
Administrative expenses …………………………..
Interest expense ……………………………………………..
Total expenses ……………………………………….
Income before income tax ………………………………………..
Income tax ……………………………………………………..
63,900
Net income ……………………………………………………….
$ 149,100
EXERCISE 4-4 (Continued)
Determination of amounts
(a) Administrative expenses
=
20% of cost of good sold
=
20% of $500,000
=
$100,000
(b) Gross sales X 8%
=
administrative expenses
=
$100,000 ÷ 8%
=
$1,250,000
=
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 $100,000
=
$400,000
Earnings per share $7.46 ($149,100 ÷ 20,000)
Note: An alternative income statement format is to show income tax part of
expenses, and not as a separate item. In this case, total expenses are
$1,083,900.
EXERCISE 4-5 (30–35 minutes)
(a) Multiple-Step Form
P. BRIDE COMPANY
Income Statement
For the Year Ended December 31, 2014
(In thousands, except earnings per share)
Sales revenue ……………………………………………..
$96,500
Cost of goods sold ………………………………………
60,570
Gross profit …………………………………………………
35,930
Operating Expenses
Selling expenses
Sales commissions …………………………..
$7,980
Depr. of sales equipment …………………..
Delivery expense ………………………………
$17,150
Administrative expenses
Officers’ salaries ………………………………
Depr. of office furn. and equip. …………..
Income from operations ……………….
Other Revenues and Gains
Rent revenue …………………………………………
17,230
27,150
Other Expenses and Losses
Interest expense …………………………………….
1,860
Income before income tax …………………………..
25,290
Income tax …………………………………………….
9,070
Net income ………………………………………………….
EXERCISE 4-5 (Continued)
(b) Single-Step Form
P. BRIDE COMPANY
Income Statement
For the Year Ended December 31, 2014
(In thousands, except earnings per share)
Revenues
Net sales ………………………………………………………………….
$ 96,500
Rental revenue …………………………..…………………………..
17,230
Total revenues ……………………………………………………
Expenses
Cost of goods sold …………………………………………………..
60,570
Selling expenses ……………………………………………………..
17,150
Administrative expenses…………………………………………..
Interest expense ………………………………………………………
1,860
Total expenses ……………………………………………………
88,440
Income before income tax ……………………………………………..
25,290
Income tax …………………………………………………………………….
9,070
Net income ………………………………………………………………
$ 16,220
Earnings per share ……………………………………………………….
Note: An alternative income statement format for the single-step form is to
show income tax a part of expenses, and not as a separate item.
(c) Single-step:
1. Simplicity and conciseness.
EXERCISE 4-5 (Continued)
Multiple-step:
1. Provides more information through segregation of operating and
nonoperating items.
EXERCISE 4-6 (30–35 minutes)
MARIA CONCHITA ALONZO CORP.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
Sales revenue …………………………………………………..
$1,380,000
Less: Sales returns and allowances …………………..
Sales discounts ………………………………………
195,000
Net sales ………………………………………………………….
Cost of goods sold ……………………………………………
621,000
Gross profit on sales …………………………..…………………
Operating Expenses
Selling expenses ……………………………………………
194,000
Administrative and general expenses ……………..
291,000
Income from operations………………………………………….
EXERCISE 4-6 (Continued)
Other Revenues and Gains
Interest revenue ……………………………………………….
86,000
Other Expenses and Losses
Interest expense ………………………………………………
60,000
Income before income tax and extraordinary item …….
Income tax ($299,000 X .34) ………………………………
Income before extraordinary item …………………………....
Extraordinary item—loss from earthquake damage ……….
($150,000 X .34) …………………………………………………..
99,000
Net income ……………………………………………………………..
$ 98,340
Per share of common stock:
Extraordinary item (net of tax) …………………………….
Income before extraordinary item
EXERCISE 4-7 (30–40 minutes)
(a) Multiple-Step Form
LATIFA SHOE CO.
Income Statement
For the Year Ended December 31, 2014
Net sales ……………………………………………….
$980,000
Cost of goods sold …………………………………
Gross profit on sales …………………………..…
484,000
Operating Expenses
Selling expenses
Salaries and Wages ……………………..
$114,800
Depr. exp. (70% X $65,000) …………..
Supplies ……………………………………..
17,600
Administrative expenses
Wages and salaries ……………………..
Depr. exp. (30% X $65,000) …………..
19,500
Income from operations………………………….
99,000
Other Revenues and Gains
Rent revenue ……………………………………
29,000
128,000
Other Expenses and Losses
Interest expense ……………………………….
18,000
Income before income tax ………………………
110,000
Income tax ……………………………………….
37,400
Net income …………………………………………….
EXERCISE 4-7 (Continued)
(b) Single-Step Form
LATIFA SHOE CO.
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales ………………………………………………………………
$ 980,000
Rent revenue …………………………..…………………………...
29,000
Total revenues ………………………………………………..
Expenses
Cost of goods sold ……………………………………………….
496,000
Selling expenses ………………………………………………….
177,900
Administrative expenses ………………………………………
207,100
Interest expense …………………………………………………..
18,000
Total expenses ………………………………………………..
899,000
Income before income tax ………………………………………….
110,000
Income tax ……………………………………………………………
37,400
Net income ………………………………………………………………..
$ 72,600
Note: An alternative income statement format for the single-step form is to
show income tax as part of expenses, and not as a separate item.
(c)
Single-step:
1. Simplicity and conciseness.
2. Probably better understood by users.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of one revenue or expense over another.
EXERCISE 4-7 (Continued)
Multiple-step:
1. Provides more information through segregation of operating and
nonoperating items.
EXERCISE 4-8 (15–20 minutes)
(a) Net sales $ 540,000
Cost of goods sold (210,000)
(b) Income from continuing operations before income tax $150,000*
Income tax ($150,000 X .30) 45,000
Income from continuing operations 105,000
EXERCISE 4-9 (30–35 minutes)
(a) IVAN CALDERON CORP.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
Net sales …………………………………………………………….
$1,300,000
Cost of goods sold ……………………………………………..
780,000
Gross profit ………………………………………………
520,000
Operating Expenses
Selling expenses …………………………………………….
$65,000
Administrative expenses …………………………………
113,000
Income from operations ……………………………………………
407,000
Other Revenues and Gains
Dividend revenue ……………………………………………
20,000
Interest revenue ……………………………………………..
7,000
27,000
434,000
Other Expenses and Losses
Write-off of inventory due to obsolescence …………..
80,000
Income before income tax and extraordinary item ………….
354,000
Income tax ……………………………………………………..
120,360
Income before extraordinary item ……………………………..
233,640
Extraordinary item
Casualty loss ………………………………………….
50,000
Less: Applicable income tax
($50,000 .34) …………………………………….
Net income ………………………………………………………………
$ 200,640
Per share of common stock:
($233,640 ÷ 60,000) …………………………..………….
Extraordinary item, net of tax …………………………..
Net income ($200,640 ÷ 60,000) ………………………..
Income before extraordinary item
EXERCISE 4-9 (Continued)
(b) IVAN CALDERON CORP.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, Jan. 1, as reported ……………………………………….
$ 980,000
(depreciation error) (net of $18,700 tax) …………………………..
Retained earnings, Jan. 1, as adjusted ……………………………………….
Less: Dividends declared ……………………………………………………….
EXERCISE 4-10 (20–25 minutes)
Computation of net income:
2014 net income after tax ……………………………………………………
$33,000,000
2014 net income before tax
[$33,000,000 ÷ (1 – .34)] …………………………..
Add back major casualty loss …………………………..
Income from operations …………………………..
Income tax (34% X $68,000,000) …………………………..
Income before extraordinary item …………………………..
Extraordinary item:
Casualty loss ……………………………………………………….
Less: Applicable income tax reduction …………………………..
(11,880,000)
EXERCISE 4-10 (Continued)
Net income ……………………………………………………………………………..
$33,000,000
Less: Provision for preferred dividends
(8% of $4,500,000) ……………………………………………………….
360,000
Income available to common stockholders …………………………..
Common stock shares ……………………………………………………….
÷10,000,000
Income statement presentation
Per share of common stock:
Income before extraordinary item …………………………..
Extraordinary item, net of tax ………………………………………..
*Rounded
EXERCISE 4-11 (20–25 minutes)
SPOCK CORPORATION
Income Statement
For the Year Ended December 31, 2014
Net sales(a) ………………………………………………………
$4,162,000
Cost of goods sold(b) ………………………………………..
2,665,000
Gross profit ………………………………………………..
1,497,000
Selling expenses(c) …………………………………………..
$636,000
Administrative expenses(d) ……………………………….
491,000
1,127,000
Income from operations ………………………………
Interest expense ………………………………………………
Income before income tax ………………………………..
Income before extraordinary item ……………………..
Extraordinary loss ……………………………………………
23,800
Income before extraordinary item ($286,440 ÷ 90,000) ………
Supporting computations
(a) Net sales:
$4,275,000 – $34,000 – $79,000 = $4,162,000
(b) Cost of goods sold:
EXERCISE 4-12 (20–25 minutes)
(a) EDDIE ZAMBRANO CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Balance, January 1, as reported ……………………………………….
$225,000*
Correction for depreciation error (net of $10,000 tax) ………..
Balance, January 1, as adjusted……………………………………….
189,000
Add: Net income …………………………..…………………………………
144,000**
333,000
Less: Dividends declared ………………………………………………..
100,000
Balance, December 31 …………………………………………………….
$233,000
(b) Total retained earnings would still be reported as $233,000. 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:
EXERCISE 4-13 (15–20 minutes)
Net income:
Income from continuing operations
before income tax ……………………………………………………….
$23,650,000
Income tax (35% X $23,650,000) …………………………..
Income from continuing operations …………………………..
Discontinued operations
Loss before income tax…………………………..
Preferred dividends declared: …………………………..
$ 1,075,000
Weighted average common shares outstanding…………………………..
4,000,000
Earnings per share
Income from continuing operations …………………………..
$3.57*
Discontinued operations, net of tax …………………………..
EXERCISE 4-14 (15–20 minutes)
(a) 2014
Income before income tax $450,000
(b) Cumulative effect for years prior to 2014.
Year
Weighted-
Average
FIFO
Difference
Tax Rate
(35%)
Net Effect
$370,000
$22,750
(c)
2014
2013
2012
Income before income tax
$450,000
$430,000
$395,000
Income tax (35%)
Net income
$292,500
$279,500
$256,750
EXERCISE 4-15 (15–20 minutes)
(a)
ROXANNE CARTER CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2014
Sales revenue …………………………………………………………………
$1,200,000
Cost of goods sold ……………………………………………………….…
750,000
Gross profit …………………………..………………………………………..
Selling and administrative expenses ………………………………..
320,000
(b)
ROXANNE CARTER CORPORATION
Income Statement and Comprehensive Income Statement
For the Year Ended December 31, 2014
Sales ………………………………………………………………………………
$1,200,000
Cost of goods sold ………………………………………………………….
750,000
Gross profit …………………………………………………………………….
450,000
Selling and administrative expenses ………………………………..
320,000
Net income ……………………………………………………….…………….
$ 130,000
Comprehensive Income
EXERCISE 4-16 (15–20 minutes)
C. REITHER CO.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2014
Total
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Common
Stock
Beginning balance
$520,000
$ 90,000
$80,000
$350,000
Comprehensive income
Net income*
120,000
120,000
Other comprehensive income
Unrealized holding loss
Comprehensive income
Dividends
(10,000)
EXERCISE 4-17 (30–35 minutes)
(a) ROLAND CARLSON INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Sales revenue …………………………………………………………………..
$1,900,000
Rent revenue …………………………………………………………………….
40,000
Total revenues ……………………………………………………….
1,940,000
Expenses
Cost of goods sold…………………………………………………..
850,000
Selling expenses ……………………………………………………..
300,000
Administrative expenses ………………………………………….
240,000
Total expenses ………………………………………………..
1,390,000
income tax ………………………………………………………….
550,000
Income tax …………………………………………………….
187,000
Income from continuing operations …………………………
363,000
Discontinued operations
Loss on discontinued operations ……………………
$75,000
Less: Applicable income tax reduction ……………
25,500
(49,500)
Income before extraordinary items ………………………….
313,500
Extraordinary items:
Extraordinary gain ………………………………………….
Less: Applicable income tax …………………………..
32,300
62,700
376,200
Extraordinary loss ………………………………………….
Less: Applicable income tax reduction ……………
20,400
(39,600)
Per share of common stock:
Income from continuing operations ($363,000 ÷ 100,000)………
$3.63
Loss on discontinued operations, net of tax …………………….
(.49)
Income before extraordinary items ($313,500 ÷ 100,000) ……….
Extraordinary gain, net of tax ………………………………………….
Extraordinary loss, net of tax ………………………………………….
(.40)