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P5-12 (continued)
2. Net income, 2007: $5,981 million; Basic net income (earnings) per common share for
2007: $2.59 (p. 66).
7. Cash dividends on common stock paid per share and in total in 2007: $1.36 per
share; $3,149 million total (p. 69).
Note to Instructor: Certain of the above information also may be located on other
pages within the financial statements and related notes.
P5-13 (AICPA adapted solution)
WOODBINE CIRCLE CORPORATION
Income Statement
For the Year Ended December 31, 2010
Sales $10,100,000
Cost of sales (6,200,000)
Gross profit $ 3,900,000
Operating income from discontinued AL
Division (less applicable income
taxes of $264,000) $396,000
Loss on sale of AL Division
Earnings per Common Share
Schedule 1: Income Taxes on Continuing Operations
Income from continuing operations
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P5-13 (continued)
Schedule 2: Income from Operations of AL Division
for the Nine Months Ended September 30, 2010
(Date of Discontinuance)
P5-14 (AICPA adapted solution)
THE CENTURY COMPANY
Comparative Statements of Income
For the Two Years Ended December 31, 2011 and
December 31, 2010
2011 2010
Net sales $7,080,000a $5,670,000a
Cost of sales (4,000,000) (3,400,000)
Gross profit on sales 3,080,000 2,270,000
Operating expenses (1,050,000) (550,000)
5-64
P5-14 (continued)
Notes to Instructor:
aThe results from operations of the discontinued office equipment
division are shown separately from the results of continuing operations.
P5-15 (AICPA adapted solution)
1. Deficiencies in the statement of earnings and retained earnings
Purchase discounts. These preferably should be shown as a reduction of purchases
in the cost-of-goods-sold computation. Although some accountants treat purchase
discounts as financing revenue, most would argue that a company theoretically
cannot generate revenue by purchasing goods.
5-65
P5-15 (continued)
2. Deficiencies in the statement of financial position
Accounts receivable, net. The allowance for doubtful accounts should be shown
either parenthetically or as a contra-asset account for disclosure.
Inventory. The basis for valuation of the inventory must be disclosed.
Land and building, net. Two deficiencies are identified. First, land and building
Due to Grant, Inc. This is a possible loss contingency but does not meet the
conditions of GAAP that requires accrual by a charge to earnings. Therefore, the
contingency should be disclosed in a note, or management may appropriate a
portion of retained earnings, as it did. Such appropriation, however, should be
included in the Stockholders’ Equity section and not shown as a liability.
3. General comments
Statement of cash flows. Oberlin Corporation should also prepare a statement of
cash flows. A statement of cash flows is required if the corporation issues an earnings
5-66
P5-16 (AICPA adapted solution)
1. Statement of Financial Position
The deferred income tax liability should not be shown on the statement because it
2. Notes
The lease discussed in note 1 is a capital lease because of the bargain purchase
option. Therefore, lease expense shown in the earnings statement is incorrect. The
present value of the future minimum lease payments (net of executory costs and
any profit thereon) should be determined and recorded on the statement of
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P5-16 (continued)
3. Earnings Statement
An analysis of the earnings statement discloses the following violations of generally
accepted accounting principles.
1. The dilutive effect of the warrants outstanding is not considered (that is, not
properly accounted for using the treasury stock method).
Net earnings are incorrect because the patent amortization expense, warranty
expense, and the extraordinary gain are omitted. To correct this, the patent
4. Statement of Retained Earnings
The extraordinary item does not belong in this statement; properly, it should be
5. General
P5-17
TIGER COMPANY
Comparative Statements of Income
For Year Ended December 31
2011 2010
Sales $2,900,000a $3,900,000b
Cost of goods sold (980,000)c (2,310,000)d
Gross profit $1,920,000 $1,590,000
Results from discontinued operations
Income (loss) from operations of
discontinued division (net of
$90,000 income tax credit in 2011
a$3,500,000 – $400,000 – $200,000
b$4,600,000 – $700,000
c$1,600,000 – $320,000 – $300,000
d$2,600,000 – $290,000
e$1,300,000 – $180,000 – $100,000
f$1,500,000 – $110,000
P5-18
1. JR COMPANY
Statement of Income and Comprehensive Income
For Year Ended December 31, 2010
Sales revenues $108,000
Cost of goods sold (62,000)
2.(a) JR COMPANY
Income Statement
For Year Ended December 31, 2010
Sales revenues $108,000
Cost of goods sold (62,000)
Net income $ 23,800
(b) JR COMPANY
Statement of Comprehensive Income
For Year Ended December 31, 2010
Net income $ 23,800
3.(a) JR COMPANY
Income Statement
For Year Ended December 31, 2010
Sales revenues $108,000
P5-19
TOPPS COMPANY
Statement of Cash Flows
For Year Ended December 31, 2010
Net Cash Flow From Operating Activities
Net income $ 47,200
Adjustments for differences between
Cash Flows From Investing Activities
Payment for purchase of machinery $ (39,500)
Payment for purchase of investments (21,000)
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P5-20
MUELLER COMPANY
Statement of Cash Flows
For Year Ended December 31, 2010
Net Cash Flow From Operating Activities
Net income $ 68,000
Adjustments for differences between
Net cash provided by operating activities $ 67,900
Cash Flows From Investing Activities
Payment for purchase of building $ (65,000)
Payment for purchase of equipment (8,000)
Net Increase in Cash $ 3,600
P5-21
TRAINER COMPANY
Statement of Cash Flows
For Year Ended December 31, 2010
Cash Flows From Operating Activities
Cash Inflows:
Cash Flows From Investing Activities
Receipt from sale of land $ 3,100
Payment for purchase of investments (17,800)
Net cash used for investing activities (14,700)