EXERCISE 4-17 (Continued)
(b) ROLAND CARLSON INC.
Comprehensive Income Statement
For the Year Ended December 31, 2014
Net income ………………………………………………………………………
$336,600
Other comprehensive income
Unrealized holding gain, net of tax ………………………………
15,000
(c) ROLAND CARLSON INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ………………………………………………….
$600,000
Add: Net income …………………………………………………………………….
Less: Dividends declared ……………………………………………………….
TIME AND PURPOSE OF PROBLEMS
Problem 4-1 (Time 30–35 minutes)
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)
Problem 4-4 (Time 45–55 minutes)
Purpose—to provide the student with the opportunity to prepare multiple-step and single-step income
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
Problem 4-7 (Time 25–35 minutes)
SOLUTIONS TO PROBLEMS
DICKINSON COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales revenue …………………………..…………………………..
$25,000,000
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
income tax …………………………………………………………………..
3,660,000
Income tax ……………………………………………………………..
1,244,000
Income from continuing operations …………………………
2,416,000
Discontinued operations
Loss on operations, net of applicable tax ………..
90,000
Loss on disposal, net of applicable tax …………..
Income before extraordinary item …………………………..
1,886,000
PROBLEM 4-1 (Continued)
DICKINSON COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 …………………………..
$ 980,000
Add: Net income …………………………………………..
1,496,000
Less Dividends declared on:
330,000
THOMPSON CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales ($1,100,000 – $14,500 – $17,500) …..
$1,068,000
Gain on disposal of land …………………………...
Rent revenue …………………………………………….
Expenses
Cost of goods sold* …………………………………..
Selling expenses ……………………………………….
Administrative expenses …………………………...
Total expenses ………………………………….
976,000
Income before income tax …………………………………..
140,000
Income tax ………………………………………………..
53,900
Net income …………………………………………………………
$ 86,100
Earnings per share ($86,100 ÷ 30,000) ………………….
$2.87
620,000
709,000
PROBLEM 4–2 (Continued)
THOMPSON CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 …………………………………………
$160,000
Less: Cash dividends …………………………..……………………….
45,000
MAHER INC.
Income Statement (Partial)
For the Year Ended December 31, 2014
Income from continuing operations
before income tax ……………………………………………….
$838,500(a)
Income tax …………………………………………………..
220,350(b)
Income from continuing operations ……………………….
618,150
Discontinued operations
Less: Applicable income tax reduction …………
Income before extraordinary item …………………………..
537,650
Extraordinary item:
Major casualty loss ………………………………………
Less: Applicable income tax reduction …………
Net income ……………………………………………………….
Per share of common stock:
Income from continuing operations ………………
$5.15*
Discontinued operations, net of tax ………………
(0.67)*
Income before extraordinary items ……………….
4.48
Extraordinary item, net of tax ……………………….
(0.40)
Net income ($489,050 ÷ 120,000)……………………
$4.08
*Rounded
As previously stated …………………………………………
Loss on sale of securities …………………………………
(57,000)
PROBLEM 4-3 (Continued)
(b)Computation of income tax:
Income from continuing operations before taxes ……….
$838,500
Taxable income………………………………………………………..
Tax rate …………………………………………………………………..
(a) TWAIN CORPORATION
Income Statement
For the Year Ended June 30, 2014
Sales
Sales revenue ……………………………………………………..
$1,578,500
Less: Sales discounts …………………………..
$31,150
Sales returns and allowances …………………….
Net sales ……………………………………………………….
Cost of goods sold …………………………..……………………….
896,770
Gross profit ……………………………………………………….
Operating Expenses
Selling expenses
Sales commissions …………………………..
97,600
Salaries and wages expense …………………………..
56,260
Travel expense ………………………………………………..
Delivery expense ……………………………………………..
21,400
Entertainment expense …………………………..
14,820
Telephone and Internet expense ……………………….
Maintenance and repairs expense …………………….
Depreciation expense …………………………..
Bad debt expense…………………………………………….
Administrative Expenses
Maintenance and repairs expense ……………..
9,130
Property tax expense …………………………………..
7,320
Depreciation expense …………………………..
7,250
Supplies expense ……………………………………..
3,450
Telephone and Internet expense ………………..
2,820
Office expenses ……………………………………….
Income from operations …………………………..
PROBLEM 4-4 (Continued)
Other Revenues and Gains
Dividend revenue ……………………………………..
38,000
Other Expenses and Losses
Interest expense ……………………………………….
18,000
Income before income tax …………………………….
Income tax ……………………………………………….
TWAIN CORPORATION
Retained Earnings Statement
For the Year Ended June 30, 2014
Retained earnings, July 1, 2013, as reported …………..
$337,000
Retained earnings, July 1, 2013, as adjusted ………….
319,300
Less:
Correction of depreciation understatement,
PROBLEM 4-4 (Continued)
(b) TWAIN CORPORATION
Income Statement
For the Year Ended June 30, 2014
Revenues
Net sales ……………………………………………………….
$1,485,050
Dividend revenue ………………………………………………..
38,000
Total revenues …………………………………………….
1,523,050
Expenses
Cost of goods sold ………………………………………………
Selling expenses …………………………………………………
Administrative expenses ……………………………………..
Interest expense ………………………………………………….
18,000
Total expenses ……………………………………………
Income before income tax ……………………………………………..
Income tax ……………………………………………………….
102,000
Earnings per common share………………………………………….
TWAIN CORPORATION
Retained Earnings Statement
For the Year Ended June 30, 2014
Retained earnings, July 1, 2013, as reported …………….
$337,000
Correction of depreciation understatement,
net of tax ……………………………………………………….
(17,700)
Retained earnings, July 1, 2013 as adjusted …………….
Add: Net income …………………………..……………………….
Dividends declared on preferred stock …………..
Dividends declared on common stock ……………
PROBLEM 4-5
1. The usual but infrequently occurring charge of $8,500,000 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 $6,000,000 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 $21,400,000. The $2,000,000 tax
3. The adjustment required for correction of an error is inappropriately
labeled and also should not be reported in the retained earnings
4. Earnings per share should be reported on the face of the income
statement and not in the notes to the financial statements. Because
(a) ACADIAN CORP.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, as reported …………………………..
$257,600
Correction of error from prior period (net of tax) ………………………..
25,400
Retained earnings, January 1, as adjusted …………………………..
Add: Net income …………………………………………………………………….
Less: Cash dividends declared …………………………………………………
32,000
Adjustment for change in accounting principle
(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,
PROBLEM 4-7
WADE CORP.
Income Statement (Partial)
For the Year Ended December 31, 2014
Income from continuing operations
before income tax ………………………………
$1,200,000*
Income tax ……………………………………
456,000**
Income from continuing operations ………..
744,000
Discontinued operations
Loss from disposal of subsidiary ……..
Income before extraordinary item …………..
626,200
Extraordinary item:
Gain on condemnation …………………..
125,000
Less: Applicable income tax …………
50,000*
75,000
Net income ……………………………………………
$ 701,200
* $125,000 40%
Per share of common stock:
Income from continuing operations …………………………….
Discontinued operations, net of tax …………………………….
Income before extraordinary item ……………………………….
Extraordinary item, net of tax ……………………………………..
Net income ($701,200 ÷ 150,000) …………………………………
PROBLEM 4-7 (Continued)
*Computation of income from continuing operations
before income tax:
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 4-1 (Time 20–25 minutes)
CA 4-2 (Time 20–25 minutes)
CA 4-3 (Time 15–20 minutes)
Purpose—to provide the student an illustration of how earnings can be managed by how losses are
reported, including ethical issues.
CA 4-4 (Time 30–35 minutes)
CA 4-5 (Time 30–40 minutes)
Purpose—to provide the student with the opportunity to comment on deficiencies in an income
CA 4-6 (Time 20–25 minutes)
Purpose—to provide the student with a variety of situations involving classification of special items. This
case is different from CA 4–5 in that an income statement is not presented. Instead, short factual
situations are described. A good comprehensive case for discussing the presentation of special items.
CA 4-7 (Time 10–15 minutes)
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 4-1
The deficiencies of O’Malley Corporation’s income statement are as follows:
1. The heading is inappropriate. The heading should include the name of the company and the period
of time for which the income statement is presented.
4. Advertising expense is a selling expense and should usually be classified as such, unless this
expense is unusually different from previous periods.
5. Loss on obsolescence of inventories might be classified as an unusual item and separately
disclosed if it is unusual or infrequent but not both.
CA 4-2
(a) Earnings management is often defined as the planned timing of revenues, expenses, gains and
losses to smooth out bumps in earnings. In most cases, earnings management is used to increase
liabilities for such items as loan losses, restructuring charges and warranty returns.
(b) Proposed Accounting
2011
2012
2013
2014
2015
Income before warranty expense
$43,000
$43,000
CA 4-2 (Continued)
(c) Appropriate Accounting
2011
2012
2013
2014
2015
Income before warranty expense
$43,000
$43,000
Warranty expense
5,000
5,000
CA 4-3
(a) The ethical issues involved are integrity and honesty in financial reporting, full disclosure,
CA 4-4
(a) It appears that the sale of the Casino Knights Division would qualify as a discontinued operation.
The operation of gambling facilities appears to meet the criteria for discontinued operations for
Simpson Corp. and, therefore, the accounting requirements related to discontinued operations should
be followed. Although the financial vice-president might be correct theoretically, professional pro–
CA 4-5
The income statement of Walters Corporation contains the following weaknesses in classification and
disclosure:
1. Sales taxes. Sales taxes have been erroneously included in both gross sales and cost of goods
sold on the income statement of Walters Corporation. Failure to deduct these taxes directly from
2. Purchase discounts. Purchase discounts should not be treated as revenue by being lumped with
other revenues such as dividends and interest. A purchase discount is more logically a reduction
3. Recoveries of accounts written off in prior years. These collections should be credited to the
allowance for doubtful accounts unless the direct write-off method was used in accounting for bad
debt expense. Generally, the direct write-off method is not allowed.
4. Delivery expense. Although delivery expense (sometimes referred to as freight-out) is an
expense of selling and is therefore reported properly in the statement, freight-in is an inventoriable
5. Loss on discontinued styles. This type of loss, though often substantial, should not be treated
6. Loss on sale of marketable securities. This item should be reported as a separate component
of income from continuing operations and not as an extraordinary item. The conditions of unusual
in nature and infrequent in occurrence are not met.
7. Loss on sale of warehouse. This type of item is specifically excluded by FASB ASC 225-20-45
8. Federal Income taxes. The provision for federal income taxes and intraperiod tax allocation are
not presented in the income statement. This omission implies that the federal income tax is a
CA 4-6
Classification
Rationale
1.
No disclosure.
Error has “washed out”; that is, subsequent
income statement compensated for the error.
However, prior year income statements should
be restated.
2.
Extraordinary item section.
Material, unusual in nature, and infrequent in
occurrence.
3.
Depreciation expense in body of income
statement, based on new useful life.
Material item, but change in estimated useful life
is considered part of normal business activity.
5.
Reported in body of the income statement,
possibly as an unusual item.
Sale does not meet criteria for either the disposal
of a component of the business or an
extraordinary item.
6.
Adjustment to the beginning balance of
retained earnings.
A change in inventory methods is a change in
accounting principle and prior periods are
adjusted.
7.
Reported in body of the income statement,
possibly as an unusual item.
Loss on preparation of such proposals is not
considered extraordinary in nature.
9.
Prior period adjustment, adjust beginning
retained earnings.
Corrections of errors are shown as prior period
adjustments.
Extraordinary item section.
Material, unusual in nature, and infrequent in
occurrence.
11.
Discontinued operations section.
Division’s assets, results of operations, and
activities are clearly distinguishable physically,
operationally, and for financial reporting
purposes.