BRIEF EXERCISES
BE. 4-100—Definitions.
Provide clear, concise answers for the following.
1. What are revenues?
2. What are expenses?
3. What are gains?
4. What are losses?
5. When does a discontinued operation occur?
6. Indicate how earnings per share is computed.
7. State the primary category of prior period adjustments and indicate how they are reported in the financial statements.
BE. 4-101—Terminology.
In the space provided, write the word or phrase that is defined or indicated.
1. Net income minus preferred dividends
divided by the weighted average of shares
outstanding. 1. ________________________________
2. All changes in equity during a period except
those resulting from investments by owners
and distributions to owners. 2. ________________________________
3. A correction of an error is reported as a 3. ________________________________
4. The portion of equity interest in a subsidiary
not attributable to the parent company. 4. ________________________________
5. The income statement category for a
disposal of a component of a business. 5. ________________________________
6. Relating tax expense to specific items
on the income statement. 6. ________________________________
BE. 4-102—Income statement disclosures.
What is disclosed in an income statement? Be specific.
EXERICSES
Ex. 4-103—Calculation of net income from the change in stockholders' equity.
Presented below is certain information pertaining to Edson Company.
Assets, January 1 $250,000
Assets, December 31 230,000
Liabilities, January 1 150,000
Common stock, December 31 90,000
Retained earnings, December 31 41,000
Common stock sold during the year 10,000
Dividends declared during the year 13,000
Compute the net income for the year.
Ex. 4-104—Calculation of net income from the change in stockholders' equity.
Presented below are changes in the account balances of Wenn Company during the year, except for retained earnings.
Increase Increase
(Decrease) (Decrease)
Cash $29,000 Accounts payable $34,000
Accounts receivable (net) (18,000) Bonds payable (20,000)
Inventory 52,000 Common stock 62,000
Plant assets (net) 57,000 Paid-in capital 16,000
The only entries in Retained Earnings were for net income and a dividend declaration of $17,000.
1. Compute the net income for the current year.
2. Explain what else can affect the Retained Earnings account.
Ex. 4-105—Income Computations
Presented below is information related to Wise Company at December 31, 2017, the end of its first year of operations.
Sales revenue $775,000
Cost of goods sold 350,000
Selling and administrative expenses 125,000
Gain on sale of plant assets 75,000
Unrealized gain on available-for-sale investments 25,000
Interest expense 15,000
Loss on discontinued operations 30,000
Allocation to noncontrolling interest 100,000
Dividends declared and paid 12,000
Instructions
Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Wise Company’s controlling stockholders, (d) comprehensive income, and (e) retained earnings balance at December 31, 2017. Ignore income tax effects.
Ex. 4-106—Income statement classifications.
Indicate the major section or subsection of a multiple-step income statement in which each of the following items would usually appear:
a. Advertising
b. Depletion
c. Dividend revenue
d. Freight-in
e. Loss on disposal of a component of a business, net of tax
f. Income taxes
g. Purchase discounts
h. Sales discounts
i. Officers' salaries
j. Freight-out
k. Interest income
Ex. 4-107—Income statement relationships.
Fill in the appropriate blanks for each of the independent situations below.
Company A Company B Company C
Sales revenue (a) $_______ $343,400 $540,000
Beginning inventory 52,600 (d) _______ 90,000
Net purchases 205,300 255,600 (g) _______
Ending inventory 52,200 108,000 63,000
Cost of goods sold (b) _______ (e) _______ 437,000
Gross profit 75,300 128,000 (h) _______
Operating expenses (c) _______ 50,000 48,000
Income before taxes 6,000 (f) _______ (i) _______
Ex. 4-108—Multiple-step income statement.
Listed below in scrambled order are 11 income statement categories. Use the numerals 1 through 11 to indicate the order in which these categories should appear on a multiple-step income statement.
( ) Discontinued operations.
( ) Cost of goods sold.
( ) Other revenues and gains.
( ) Net income.
( ) Income taxes.
( ) Sales revenue.
( ) Gross profit on sales.
( ) Income from operations.
( ) Income from continuing operations before income taxes.
( ) Operating expenses.
( ) Income from continuing operations.
Ex. 4-109—Multiple-step income statement.
Hendrick, Inc. has the following data for the year ended December 31, 2017:
Net sales $270,000
Discontinued operations loss 20,000
Cost of goods sold 165,000
Interest expense 3,000
Selling expenses 15,000
Administrative expenses 35,000
Shares of capital stock outstanding, 10,000
Tax rate of 30% on all items
Instructions
Prepare a multiple-step income statement for Hendrick, Inc. for the year ended December 31, 2017.
Ex. 4-110—Income computations.
Presented below is financial information of the Martin Corporation for 2017.
Gain on the sale of investments 160,000
Net sales 45,000,000
Cost of goods sold 31,000,000
Loss on disposal of wholesale division 670,000
Interest revenue 105,000
Loss on operations of wholesale division 690,000
Selling and administrative expenses 8,200,000
Dividends declared on common stock 340,000
Write off of goodwill 780,000
Dividends declared on preferred stock 120,000
Effective tax rate on all items is 34%
Martin Corporation decided to discontinue its wholesale operations and to retain their manufacturing operations. On July 1, Martin sold the wholesale operations. During 2017, there were 800,000 shares of common stock outstanding all year.
Instructions
Compute each of the following.
1. Income from operations
2. Income before income tax
3. Income from continuing operations
4. Net income
5. Earnings per share
Ex. 4-111—Multiple-step income statement
Presented below is information related to Donaldson Corp., for the year 2017.
Net sales $1,950,000
Cost of goods sold 1,200,000
Selling expenses 95,000
Administrative expenses 70,000
Dividend revenue 30,000
Interest revenue 20,000
Interest expense 45,000
Write-off of goodwill due to impairment 75,000
Depreciation expense omitted in 2015 105,000
Dividends declared 120,000
Effect on prior years of change in accounting principle (credit) 220,000
Loss from operations of discontinued component of business 240,000
Gain from disposal of component of business 300,000
Federal tax rate of 30% on all items
Instructions
Prepare a multiple-step income statement for 2017. Assume the 200,000 shares of common stock were outstanding during 2017.
Ex. 4-112—Classification of income statement and retained earnings statement items.
For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections:
a. Continuing operations
b. Discontinued operations
c. Prior period adjustment
1. The bad debt rate was increased from 1% to 2%, thus increasing bad debt expense.
2. Obsolete inventory was written off. This was the first loss of this type in the company's history.
3. Loss on sale of investments. The company last sold some of its investments two years ago.
4. Recognition of income earned last year which was inadvertently omitted from last year's income statement.
5. The company sold one of its warehouses at a loss.
6. Settlement of litigation with federal government related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes.
7. Loss on the disposal of a component of a business.
8. The company neglected to record its depreciation in the previous year.
9. Discontinuance of all production in the United States. The manufacturing operations were relocated in Mexico.
PROBLEMS
Pr. 4-113—Multiple-step income statement.
Presented below is information related to Farr Company.
Retained earnings, December 31, 2017 $ 650,000
Sales revenue 1,600,000
Selling and administrative expenses 290,000
Discontinued operations loss (pre-tax) 290,000
Cash dividends declared on common stock 33,600
Cost of goods sold 880,000
Gain resulting from computation error on depreciation charge in 2016 (pre-tax) 520,000
Other revenue 120,000
Other expenses 100,000
Instructions
Prepare in good form a multiple-step income statement for the year 2018. Assume a 30% tax rate and that 80,000 shares of common stock were outstanding during the year.
Pr. 4-114—Income statement form.
Wilcox Corporation had income from continuing operations of $650,000 (after taxes) in 2017. In addition, the following information, which has not been considered, is as follows.
1. A machine was sold for $140,000 cash during the year at a time when its book value was $110,000. (Depreciation has been properly recorded.) The company often sells machinery of this type.
2. Wilcox decided to discontinue its stereo division in 2017. During the current year, the loss on the disposal of this component of the business was $210,000 less applicable taxes.
Instructions
Present in good form the income statement of Wilcox Corporation for 2017 starting with "income from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 shares of common stock were outstanding during the year.
Pr. 4-115—Multiple-step income statement.
Shown below is an income statement for 2017 that was prepared by a poorly trained bookkeeper of Howell Corporation.
Howell Corporation
INCOME STATEMENT
December 31, 2017
Sales revenue $ 815,000
Investment revenue 19,500
Cost of goods sold (408,500)
Selling expenses (145,000)
Administrative expenses (195,000)
Interest expense (13,000)
Income before special items 73,000
Special items
Loss on disposal of a component of the business (40,000)
Net federal income tax liability (19,900)
Net income $ 23,100
Instructions
Prepare a multiple-step income statement for 2017 for Howell Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology). Howell Corporation has 50,000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items. Round all earnings per share figures to the nearest cent.
Pr. 4-116—Single-step income statement.
Presented below is an income statement for Kinder Company for the year ended December 31, 2017.
Kinder Company
Income Statement
For the Year Ended December 31, 2017
Net sales $840,000
Costs and expenses:
Cost of goods sold 560,000
Selling, general, and administrative expenses 70,000
Other, net 40,000
Total costs and expenses 670,000
Income before income taxes 170,000
Income taxes 51,000
Net income $119,000
Additional information:
1. "Selling, general, and administrative expenses" included a usual but infrequent charge of $7,000 due to a loss on the sale of investments.
2. "Other, net" consisted of interest expense, $10,000, and a discontinued operations loss of $30,000 before taxes. If the discontinued operations loss had not occurred, income taxes for 2017 would have been $60,000 instead of $51,000.
4. Kinder had 40,000 shares of common stock outstanding during 2017.
Instructions
Using the single-step format, prepare a corrected income statement, including the appropriate per share disclosures.
Pr. 4-117—Income statement and retained earnings statement.
Porter Corporation's capital structure consists of 50,000 shares of common stock. At December 31, 2017 an analysis of the accounts and discussions with company officials revealed the following information:
Sales revenue $1,250,000
Discontinued operations loss (net of tax) 63,000
Selling expenses 128,000
Cash 60,000
Accounts receivable 90,000
Common stock 200,000
Cost of goods sold 700,000
Accumulated depreciation-machinery 180,000
Dividend revenue 8,000
Unearned service revenue 4,400
Interest payable 1,000
Land 370,000
Patents 100,000
Retained earnings, January 1, 2017 270,000
Interest expense 17,000
Administrative expenses 170,000
Dividends declared 24,000
Allowance for doubtful accounts 5,000
Notes payable (maturity 7/1/20) 200,000
Machinery 450,000
Materials 40,000
Accounts payable 60,000
The amount of income taxes applicable to income was $72,900, excluding the tax effect of the discontinued operations loss which amounted to $27,000.
Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a retained earnings statement.
Pr. 4-118—Unusual items and financial statements.
The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the seven items listed below during the fiscal year ending December 31, 2017. Assume a tax rate of 40 percent.
1. Office equipment purchased January 1, 2017 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected salvage value. Bakersfield uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been recorded.
2. The corporation disposed of its sporting goods division during 2017. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $20,000 before taxes on the disposal of the division. All of these events occurred in 2017 and have not been recorded.
3. The company recorded advances of $10,000 to employees made December 31, 2017 as Salaries and Wages Expense.
4. Dividends of $10,000 during 2017 were recorded as an operating expense.
5. In 2017, Bakersfield changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2017 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement.
6. On January 1, 2013, Bakersfield bought a building that cost $85,000, had an estimated useful life of ten years, and had a salvage value of $5,000. Bakersfield uses the
straight-line depreciation method to depreciate the building. In 2017, it was estimated that the remaining useful life was eight years and the salvage value was zero. Depreciation expense reported on the 2017 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made.
Part A. For each item, record corrections to income from continuing operations before taxes, if any. Denote any negative numbers by using brackets < >.
IFRS QUESTIONS
True/False
1. Both U.S. GAAP and IFRS discuss income statement presentation using either a
single-step or multi-step approach.
2. Under IFRS, both revenues and expenses and other income and expenses are reported as part of income from operations.
3. IFRS allows for revaluation of long-term tangible and intangible assets with the differences
impacting equity but not net income.
4. Both IFRS and U.S. GAAP allow for comprehensive income to be reported in either a
Statement of Stockholders' Equity or a Statement of Recognized Income and Expense.
5. Under IFRS, a company may classify expenses by function, but must also disclose the
classification of expenses by nature.
Multiple Choice:
6. The IFRS income statement classification of expenses by nature results in descriptions
which include all of the following except
a. salaries
b. depreciation
c. distribution
d. utilities
7. Boston Company owns more than 50 percent of the ordinary shares of Dynamic Company. Assume Boston net income of $225,000 is allocated as $180,000 to Boston and $45,000 to noncontrolling interest. In Boston’s consolidated income statement that includes Dynamic, under IFRS, how will the amount of non-controlling interest be reported?
a. $45,000 will be presented as an item of expense below the net income.
b. $45,000 will be presented as an item of expense above the net income.
c. $45,000 will be presented as an allocation to net income below the net income.
d. $45,000 will not be presented on the face of the income statement.
8. An IFRS statement might include all of the following except
a. net income or loss.
b. unrealized gains or losses on the revaluation of long-term assets.
c. cumulative effect of a change in accounting principle.
d. extraordinary gain or loss.
9. Discontinued operations of a component of a business are classified as a separate item in the income statement:
a. after “income from continuing operations”.
b. before “income from continuing operations”.
c. between income from operations and income before income tax.
d. immediately after “gross profit”.
10. If a company prepares a consolidated income statement, IFRS requires that net income be reported for:
a. the controlling interest only.
b. the noncontrolling interest only.
c. both the controlling and the noncontrolling interest.
d. as a single amount only.
11. Which of the following is true of expense classification under IFRS?
a. The nature-of-expense method identifies the major cost drivers of the company.
b. The nature-of-expense method does not classify the expenses into various subtotals.
c. The function-of-expense method is simple to apply because allocations of expense to different functions are not necessary.
d. IFRS allows only function-of-expense method for expense classification.
