PROBLEMS
P4-1 (L03,4,6) (Multiple-Step Statement, Retained Earnings Statement) The following information is related to Dickinson
Company for 2017.
Retained earnings balance, January 1, 2017 $ 980,000
Sales revenue 25,000,000
Cost of goods sold 16,000,000
Interest revenue 70,000
Selling and administrative expenses 4,700,000
Write-off of goodwill 820,000
Income taxes for 2017 1,244,000
Gain on the sale of investments 110,000
Loss due to flood damage 390,000
Loss on the disposition of the wholesale division (net of tax) 440,000
Loss on operations of the wholesale division (net of tax) 90,000
Dividends declared on common stock $ 250,000
Dividends declared on preferred stock 80,000
Dickinson Company decided to discontinue its entire wholesale operations (considered a discontinued operation) and to retain its manufacturing operations. On September 15, Dickinson sold the wholesale operations to Rogers Company. During 2017, there were 500,000 shares of common stock outstanding all year.
Instructions
Prepare a multiple-step income statement and a retained earnings statement.
P4-2 (L03,4,6) EXCEL (Single-Step Statement, Retained Earnings Statement, Periodic Inventory) Presented below is the trial balance of Thompson Corporation at December 31, 2017.
THOMPSON CORPORATION
TRIAL BALANCE
DECEMBER 31, 2017
Debit Credit
Purchase Discounts $ 10,000
Cash $ 189,700
Accounts Receivable 105,000
Rent Revenue 18,000
Retained Earnings 160,000
Salaries and Wages Payable 18,000
Sales Revenue 1,100,000
Notes Receivable 110,000
Accounts Payable 49,000
Accumulated Depreciation—Equipment 28,000
Sales Discounts 14,500
Sales Returns and Allowances 17,500
Notes Payable 70,000
Selling Expenses 232,000
Administrative Expenses 99,000
Common Stock 300,000
Income Tax Expense 53,900
Cash Dividends 45,000
Allowance for Doubtful Accounts 5,000
Supplies 14,000
Freight-In 20,000
Land 70,000
Equipment 140,000
Bonds Payable 100,000
Gain on Sale of Land 30,000
Accumulated Depreciation—Buildings 19,600
Inventory 89,000
Buildings 98,000
Purchases 610,000
Totals $1,907,600 $1,907,600
A physical count of inventory on December 31 resulted in an inventory amount of $64,000; thus, cost of goods sold for 2017 is $645,000.
Instructions
Prepare a single-step income statement and a retained earnings statement. Assume that the only changes in retained earnings during the current year were from net income and dividends. Thirty thousand shares of common stock were outstanding the entire year.
P4-3 (L03,4,5) EXCEL GROUPWORK (Various Income-Related Items) Maher Inc. reported income from continuing operations before taxes during 2017 of $790,000. Additional transactions occurring in 2017 but not considered in the $790,000 are as follows.
1. The corporation experienced an uninsured flood loss in the amount of $90,000 during the year.
2. At the beginning of 2015, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, but failed to deduct the salvage value in computing the depreciation base.
188 Chapter 4 Income Statement and Related Information
3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax).
4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable).
5. The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations.
6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2015 income by $60,000 and decrease 2016 income by $20,000 before taxes. The
FIFO method has been used for 2017. The tax rate on these items is 40%.
Instructions
Prepare an income statement for the year 2017 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares.
(Assume a tax rate of 30% on all items, unless indicated otherwise.)
P4-4 (L03,4,5,6) (Multiple- and Single-Step Statements, Retained Earnings Statement) The following account balances were included in the trial balance of Twain Corporation at June 30, 2017.
Sales revenue $1,578,500 Depreciation expense (office
Sales discounts 31,150 furniture and equipment) $ 7,250
Cost of goods sold 896,770 Property tax expense 7,320
Salaries and wages expense (sales) 56,260 Bad debt expense (selling) 4,850
Sales commissions 97,600 Maintenance and repairs
Travel expense (salespersons) 28,930 expense (administration) 9,130
Delivery expense 21,400 Office expense 6,000
Entertainment expense 14,820 Sales returns and allowances 62,300
Telephone and Internet expense (sales) 9,030 Dividends received 38,000
Depreciation expense (sales equipment) 4,980 Interest expense 18,000
Maintenance and repairs expense (sales) 6,200 Income tax expense 102,000
Miscellaneous selling expenses 4,715 Depreciation understatement
Office supplies used 3,450 due to error—2014 (net of tax) 17,700
Telephone and Internet expense Dividends declared on
(administration) 2,820 preferred stock 9,000
Dividends declared on common stock 37,000
The Retained Earnings account had a balance of $337,000 at July 1, 2016. There are 80,000 shares of common stock outstanding.
Instructions
(a) Using the multiple-step form, prepare an income statement and a retained earnings statement for the year ended June 30,
2017.
(b) Using the single-step form, prepare an income statement and a retained earnings statement for the year ended June 30,
2017.
P4-5 (L03,4,5,6) (Unusual or Infrequent Items) Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017.
(000 omitted)
Net sales revenue $640,000
Costs and expenses
Cost of goods sold $500,000
Selling, general, and administrative expenses 66,000
Other, net 17,000 583,000
Income before income tax 57,000
Income tax 19,400
Net income 37,600
Retained earnings at beginning of period, as previously reported 141,000
Adjustment required for correction of error (7,000)
Retained earnings at beginning of period, as restated 134,000
Dividends on common stock (12,200)
Retained earnings at end of period $159,400
Additional facts are as follows.
1. “Selling, general, and administrative expenses” for 2017 included a charge of $8,500,000 that was usual but infrequently occurring.
2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000.
3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).
4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
P4-6 (L04,5,6) (Retained Earnings Statement, Prior Period Adjustment) Below is the Retained Earnings account for the year 2017 for Acadian Corp.
Retained earnings, January 1, 2017 $257,600
Add:
Gain on sale of investments (net of tax) $41,200
Net income 84,500
Refund on litigation with government, related to the year 2014
(net of tax) 21,600
Recognition of income earned in 2016, but omitted from income statement in that year (net of tax) 25,400 172,700
430,300
Deduct:
Loss on discontinued operations (net of tax) 35,000
Write-off of goodwill (net of tax) 60,000
Cumulative effect on income of prior years in changing from
LIFO to FIFO inventory valuation in 2017 (net of tax) 23,200
Cash dividends declared 32,000 150,200
Retained earnings, December 31, 2017 $280,100
Instructions
(a) Prepare a corrected retained earnings statement. Acadian Corp. normally sells investments of the type mentioned above.
FIFO inventory was used in 2017 to compute net income.
(b) State where the items that do not appear in the corrected retained earnings statement should be shown.
P4-7 (L03,4,5) GROUPWORK (Income Statement, Irregular Items) Wade Corp. has 150,000 shares of common stock outstanding.
In 2017, the company reports income from continuing operations before income tax of $1,210,000. Additional transactions not considered in the $1,210,000 are as follows.
1. In 2017, Wade Corp. sold equipment for $40,000. The machine had originally cost $80,000 and had accumulated depreciation of $30,000. The gain or loss is considered non-recurring.
2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $190,000 before taxes.
Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was $90,000 before taxes; the loss from disposal of the subsidiary was $100,000 before taxes.
3. An internal audit discovered that amortization of intangible assets was understated by $35,000 (net of tax) in a prior period.
The amount was charged against retained earnings.
4. The company recorded a non-recurring gain of $125,000 on the condemnation of some of its property (included in the $1,210,000).
Instructions
Analyze the above information and prepare an income statement for the year 2017, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)
