SOLUTIONS TO PROBLEMS
P5-1
1. MACK COMPANY
Income Statement
For Year Ended December 31, 2010
Sales $XXXX
Less: Sales discounts taken $ XX
Sales returns and allowances XX (XXX)
Net sales $XXXX
Cost of goods sold
Cost of goods sold (XXX)
Gross profit $XXXX
Operating expenses
Selling expenses
Sales commissions $ XX
Administrative expenses
Administrative salaries $ XX
Bad debt expense XX
Insurance expense XX
Office salaries XX
Miscellaneous office expenses XX
P5-1 (continued)
1. (continued)
Other items
Rent revenue $ XX
Dividends revenue XX
Gain on sale of equipment XX
Loss from operations of discontinued
Division T (net of income tax credit) $(XXX)
Gain on sale of Division T (net of
income taxes) XXX XXX
2. MACK COMPANY
Statement of Comprehensive Income
For Year Ended December 31, 2010
Net income $XXXX
Other comprehensive income
P5-1 (continued)
3. MACK COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $XXXX
Add: Prior period adjustment,
P5-2
1. B 12.
L 23.
J
2. E 13.
E 24.
H
P5-3
1. CAMERON COMPANY
Partial Income Statement
For Year Ended December 31, 2010
Pretax income from continuing operations $120,000
Income tax expense (36,000)
Earnings per Common Share
Components of Income (21,000 common shares)
Income from continuing operations $4.00
2. CAMERON COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $212,000
Add: Prior period adjustment, correction
P5-4
1. CUNNINGHAM COMPANY
Partial Income Statement
For Year Ended December 31, 2010
Pretax income from continuing operations $150,500
Income tax expense (45,150)
Income from continuing operations $105,350
Earnings per Common Share
Components of Income (30,000 common shares)
Income from continuing operations $3.51
2. CUNNINGHAM COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $365,200
Less: Prior period adjustment, correction
P5-5
1. HOUSTON MANUFACTURING COMPANY
For Year Ended December 31, 2010
Schedule 1: Selling Expenses
Sales salaries expense $ 27,400
Schedule 2: General and Administrative Expenses
Depreciation expense: buildings and office equipment $ 14,400
P5-5 (continued)
2. HOUSTON MANUFACTURING COMPANY
Income Statement
For Year Ended December 31, 2010
Sales $468,200
Less: Sales returns (5,000)
Net sales $463,200
Other items
Interest revenue $ 3,200
Miscellaneous rent revenue 5,900
Loss on sale of factory equipment (4,100) 5,000
Pretax income from continuing operations $107,500
Income tax expense (32,250)
Net Income $ 72,450
Earnings per Common Share
Components of Income (20,000 common shares*)
Income from continuing operations $3.76
P5-5 (continued)
3. HOUSTON MANUFACTURING COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $200,800
Less: Prior period adjustment, correction
Houston Manufacturing Company’s return on stockholders’ equity for 2010 of 14.5%
was below its target of 15%. However, Houston had both results from discontinued
operations and an extraordinary loss in 2010. If income from continuing operations
($75,250) had been used as the numerator, the 15.1% return exceeds the target
return.
5. If Houston Manufacturing Company used IFRS, its income statement presentation and
content might differ as follows:
(a) It could choose to use either the single-step or multiple-step format;
(b) It might use the term “Turnover” instead of Sales;
P5-6
1. CRANDLE CORPORATION
For Year Ended December 31, 2010
Schedule 1: Selling Expenses
Selling Expenses
Depreciation expense: sales fixtures $ 8,500
Schedule 2: General and Administrative Expenses
General and Administrative Expenses
P5-6 (continued)
2. CRANDLE CORPORATION
Income Statement
For Year Ended December 31, 2010
Revenues
Sales (net of $11,300 returns and
Income tax expense 21,210*
Total expenses (317,910)
Income from continuing operations $ 49,490
Results from discontinued operations
Earnings per Common Share
Components of Income (11,000 common shares#)
Income from continuing operations $4.50
Results from discontinued operations (1.04)
Extraordinary loss due to flood (0.35)
Net income $3.11
Note: As a result of its recent analysis of uncollectible accounts receivable, the
P5-6 (continued)
3. CRANDLE CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $428,900
Add: Prior period adjustment, correction
Crandle Corporation’s profit margin increased 1.5 percentage points from 2009 to
2010, so it appears to have better control over its expenses in relation to sales.
P5-7
1. SILVOSO COMPANY
For Year Ended December 31, 2010
Schedule 1: Cost of Goods Sold
Inventory, 1/1/2010 $ 37,800
Purchases $173,000
Schedule 2: Selling Expenses
Sales commissions and salaries $ 18,200
Schedule 3: General and Administrative Expenses
Bad debt expense $ 2,700
Office supplies expense 1,400
P5-7 (continued)
2. SILVOSO COMPANY
Income Statement
For Year Ended December 31, 2010
Sales $340,700
Less: Sales discounts taken $ 4,900
Sales returns and allowances 12,100 (17,000)
Net sales $323,700
Cost of goods sold (Schedule 1) (179,900)
Gross profit $143,800
Operating expenses
Pretax income from continuing operations $ 24,800
Income tax expense (7,440)
Income from continuing operations $ 17,360
Results from discontinued operations
Loss from operations of discontinued
Earnings per Common Share
Components of Income (8,000 common shares*)
Income from continuing operations $2.17
Results from discontinued operations 0.11
5-54
P5-7 (continued)
3. SILVOSO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $83,700
Less: Prior period adjustment, correction
Silvoso Company’s return on stockholders‘ equity decreased over 3 percentage
points from 2009 to 2010, so it appears to have provided a poorer return to its owners.
However, a better comparison would be the return on stockholders’ equity based on
income from continuing operations, since Silvoso discontinued a segment and had a
large extraordinary loss that decreased its return in 2010, which it may not have had
in 2009.
5-55
P5-8
1. Income statement:
a. The statement properly should be titled “Income Statement,” not “Revenue
Statement.”
b. The income statement reflects results for a period of time, not a point in
time. The heading should read “For Year Ended December 31, 2010.”
i. Income tax expense on income from continuing operations is not part of
Operating Expenses. It is deducted from pretax income from continuing
operations to determine income from continuing operations.
j. Dividend revenue should be reported under Other Items.
k. General and administrative expenses are part of Operating Expenses.
Statement of retained earnings:
a. The statement of retained earnings reflects results for a period of time,
not a particular point in time. It should be dated “For Year Ended
5-56
P5-8 (continued)
2. ROX CORPORATION
Income Statement
For Year Ended December 31, 2010
Sales (net) $179,000
Cost of goods sold (110,700)
Gross profit $ 68,300
Interest expense (4,100) (7,100)
Pretax income from continuing operations $ 17,900
Income tax expense (5,370)
Income from continuing operations $ 12,530
Results from discontinued operations
Earnings per Common Share
Components of Income (5,000* common shares)
Income from continuing operations $2.51
P5-8 (continued)
3. ROX CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $ 62,850
Add: Prior period adjustment; correction
P5-9
1. OLSON COMPANY
Income Statement
For Year Ended December 31, 2010
Sales (net) $196,000
Cost of goods sold (120,100)
5-58
P5-9 (continued)
1. (continued)
Earnings per Common Share
Components of Income (8,000 common shares)
Income from continuing operations $3.64
2. OLSON COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, 1/1/2010 $ 59,300
Less: Prior period adjustment, correction
P5-10
1. Income statement; disclose as an Extraordinary Item. Since the earthquake is
unusual in nature in this area and it is of infrequent occurrence, the resulting loss is
treated as an extraordinary item.
P5-10 (continued)
6. Income statement; disclose as part of Other Items. The fact that a similar
earthquake occurred in the same region 2 years ago indicates that earthquakes are
not infrequent in this area and the loss should not be considered an extraordinary
item.
9. Income statement; disclose in Results from Discontinued Operations. Since the
baseball team is a component of the business and is distinguishable from the
an extraordinary item.
P5-11
1. Loss on Write-Down of Held-For-Sale
Division J (pretax) 80,000a
Assets of Division J 80,000
5-60
P5-11 (continued)
2. WOODS COMPANY
Income Statement
For Year Ended December 31, 2010
Sales revenue $950,000
Cost of goods sold (560,000)
Gross profit $390,000
Earnings per Common Share
Components of Income (50,000 common shares)
Income from continuing operations $2.80
3. WOODS COMPANY
Partial Balance Sheet
December 31, 2010
Assets Liabilities
Other Assets: Other Liabilities:
P5-12
1. The company uses a multiple-step income statement (p. 66) because it deducts cost of
goods sold from net operating revenues to determine gross profit, then deducts selling,