Financial Accounting 2th eidtion chapter 4 solution manual

Prepare an income statement for the year ended December 31, 2015.. BE4-6 Indicate in what section gross profit, income from operations, or income before income tax the following items ar

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Intermediate Accounting

IFRS Edition-2nd Questions & Solutions

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BE4-1 Starr Co had sales revenue of £540,000 in 2015 Other items recorded during the year were:

Cost of goods sold £330,000 Selling expenses 120,000

Increase in value of employees 15,000 Administrative expenses 10,000 Prepare an income statement for Starr for 2015 Starr has 100,000 shares outstanding.

BE4-2 Brisky Corporation had net sales of $2,400,000 and interest revenue of $31,000 during 2015 penses for 2015 were cost of goods sold $1,450,000, administrative expenses $212,000, selling expenses

Ex-$280,000, and interest expense $45,000 Brisky’s tax rate is 30% The corporation had 100,000 shares rized and 70,000 shares issued and outstanding during 2015 Prepare an income statement for the year ended December 31, 2015.

autho-BE4-3 Presented below is some financial information related to Volaire Group, a service company.

BE4-4 The following information is provided.

Sales revenue HK$100,000 Cost of goods sold HK$55,000 Gain on sale of plant assets 30,000 Interest expense 5,000 Selling and administrative expenses 10,000 Income tax rate 20% Determine (a) income from operations, (b) income before income tax, and (c) net income.

BE4-5 The following information is provided about Caltex Company: income from operations $430,000, loss on inventory write-downs $12,000, selling expenses $62,000, and interest expense $20,000 The tax rate

is 30% Determine net income.

BE4-6 Indicate in what section (gross profit, income from operations, or income before income tax) the following items are reported: (a) interest revenue, (b) interest expense, (c) loss on impairment of goodwill, (d) sales revenue, and (e) administrative expenses.

BE4-7 Finley Corporation had income from continuing operations of £10,600,000 in 2015 During 2015, it disposed of its restaurant division at an after-tax loss of £189,000 Prior to disposal, the division operated

at a loss of £315,000 (net of tax) in 2015 Finley had 10,000,000 shares outstanding during 2015 Prepare a partial income statement for Finley beginning with income from continuing operations.

BE4-8 During 2015, Williamson Company changed from FIFO to weighted-average inventory pricing Pretax income in 2014 and 2013 (Williamson’s first year of operations) under FIFO was $160,000 and

$180,000, respectively Pretax income using weighted-average pricing in the prior years would have been

$145,000 in 2014 and $170,000 in 2013 In 2015, Williamson Company reported pretax income (using weighted-average pricing) of $180,000 Show comparative income statements for Williamson Company, beginning with “Income before income tax,” as presented on the 2015 income statement (The tax rate in all years is 30%.)

BE4-9 Vandross Company has recorded bad debt expense in the past at a rate of 1½% of net sales In 2015, Vandross decides to increase its estimate to 2% If the new rate had been used in prior years, cumulative bad debt expense would have been €380,000 instead of €285,000 In 2015, bad debt expense will be €120,000 instead of €90,000 If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

BE4-10 In 2015, Hollis Corporation reported net income of $1,000,000 It declared and paid preference dividends of $250,000 During 2015, Hollis had a weighted average of 190,000 ordinary shares outstanding Compute Hollis’s 2015 earnings per share.

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Exercises 165

BE4-11 Tsui Corporation has retained earnings of NT$675,000 at January 1, 2015 Net income during 2015

was NT$1,400,000, and cash dividends declared and paid during 2015 totaled NT$75,000 Prepare a

re-tained earnings statement for the year ended December 31, 2015.

BE4-12 Using the information from BE4-11, prepare a retained earnings statement for the year ended

December 31, 2015 Assume an error was discovered: Land costing NT$80,000 (net of tax) was charged to

repairs expense in 2014.

BE4-13 On January 1, 2015, Otano Inc had cash and share capital of ¥60,000,000 At that date, the company

had no other asset, liability, or equity balances On January 2, 2015, it purchased for cash ¥20,000,000 of

equity securities that it classified as non-trading It received cash dividends of ¥3,000,000 during the year

on these securities In addition, it has an unrealized holding gain on these securities of ¥4,000,000 (net of

tax) Determine the following amounts for 2015: (a) net income, (b) comprehensive income, (c) other

comprehensive income, and (d) accumulated other comprehensive income (end of 2015).

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E4-1 (Compute Income Measures) Presented below is information related to Viel Company at

December 31, 2015, the end of its first year of operations.

Selling and administrative expenses 50,000 Gain on sale of plant assets 30,000 Unrealized gain on non-trading equity securities 10,000

Loss on discontinued operations 12,000 Allocation to non-controlling interest 40,000 Dividends declared and paid 5,000

Instructions

Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Viel

Company controlling shareholders, (d) comprehensive income, and (e) retained earnings balance at

December 31, 2015.

E4-2 (Computation of Net Income) Presented below are changes in all account balances of Jackson

Furni-ture Co during the current year, except for retained earnings.

Cash £ 69,000 Accounts Payable £ (51,000) Accounts Receivable (net) 45,000 Bonds Payable 82,000 Inventory 127,000 Share Capital—Ordinary 138,000 Investments (47,000)

Instructions

Compute the net income for the current year, assuming that there were no entries in the Retained Earnings

account except for net income and a dividend declaration of £24,000 which was paid in the current year.

E4-3 (Income Statement Items) Presented below are certain account balances of Wade Products Co.

Rent revenue $ 6,500 Sales discounts $ 7,800 Interest expense 12,700 Selling expenses 99,400 Beginning retained earnings 114,400 Sales revenue 400,000 Ending retained earnings 134,000 Income tax expense 26,600 Dividend revenue 71,000 Cost of goods sold 184,400 Sales returns and allowances 12,400 Administrative expenses 82,500

Instructions

From the foregoing, compute the following: (a) total net revenue, (b) net income, and (c) dividends

declared during the current year.

E4-4 (Income Statement Presentation) The financial records of Dunbar Inc were destroyed by fire at

the end of 2015 Fortunately, the controller had kept the following statistical data related to the income

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166 Chapter 4 Income Statement and Related Information

3. 30,000 ordinary shares were outstanding for the entire year.

4. Interest expense was $20,000.

5. The income tax rate is 30%.

6. Cost of goods sold amounts to $500,000.

7. Administrative expenses are 18% of cost of goods sold but only 8% of gross sales.

8. Four-fifths of the operating expenses relate to sales activities.

Instructions

From the foregoing information, prepare an income statement for the year 2015.

E4-5 (Income Statement) Presented below is information related to Webster Company (amounts in thousands).

Administrative expenses Offi cers’ salaries £ 4,900 Depreciation of offi ce furniture and equipment 3,960

Prepare an income statement for the year 2015 Ordinary shares outstanding for 2015 total 40,550 (in thousands).

E4-6 (Income Statement Items) The following balances were taken from the books of Parnevik Corp on December 31, 2015.

Interest revenue € 86,000 Accumulated depreciation—buildings € 28,000

Accounts receivable 150,000 Accounts payable 170,000

Sales returns and allowances 150,000 Administrative and general expenses 97,000

Allowance for doubtful accounts 7,000 Accrued liabilities 32,000

Equipment 200,000 Loss from impairment of plant assets 120,000

Cost of goods sold 621,000 Retained earnings 21,000

Accumulated depreciation—equipment 40,000

Assume the total effective tax rate on all items is 34%.

Instructions

Prepare an income statement; 100,000 ordinary shares were outstanding during the year.

E4-7 (Income Statement) The accountant of Weatherspoon Shoe Co has compiled the following

informa-tion from the company’s records as a basis for an income statement for the year ended December 31, 2015.

Loss on sale of plant assets 15,000 There were 20,000 ordinary shares outstanding during the year.

Instructions

(a) Prepare a comprehensive income statement using the combined statement approach.

(b) Prepare a comprehensive income statement using the two statement approach.

(c) Which format do you prefer? Discuss.

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Cash dividends declared (2015) 20,000 Cash dividends paid (2015) 15,000 Discontinued operations (loss before income tax) 40,000 Depreciation expense, not recorded in 2014 30,000 Retained earnings, December 31, 2014 90,000 Effective tax rate 30%

Instructions

(a) Compute net income for 2015.

(b) Prepare a partial income statement beginning with income before income tax, and including

appro-priate earnings per share information Assume 20,000 ordinary shares were outstanding during 2015.

E4-9 (Income Statement with Retained Earnings) Presented below is information related to Tao Corp for

the year 2015 (amounts in thousands).

Net sales HK$1,200,000 Write-off of inventory due to obsolescence HK$ 80,000

Cost of goods sold 780,000 Depreciation expense omitted by accident in 2014 40,000

Administrative expenses 48,000 Cash dividends declared 45,000

Dividend revenue 20,000 Retained earnings at December 31, 2014 980,000

Interest revenue 7,000 Effective tax rate of 34% on all items

Instructions

(a) Prepare an income statement for 2015 Assume that 60,000 ordinary shares are outstanding.

(b) Prepare a retained earnings statement for 2015.

E4-10 (Earnings per Share) The equity section of Sosa Corporation appears below as of December 31, 2015.

Share capital—preference (6% preference shares, R$50 par value, authorized 100,000 shares, outstanding 90,000 shares) R$ 4,500,000 Share capital—ordinary (R$1 par, authorized and issued 10 million shares) 10,000,000

R$202,000,000 Net income for 2015 reflects a total effective tax rate of 20% Included in the net income figure is a loss of R$12,000,000 (before tax) as a result of discontinued operations Preference dividends of R$270,000 were

declared and paid in 2015 Dividends of R$1,000,000 were declared and paid to ordinary shareholders in 2015.

Instructions

Compute earnings per share data as it should appear on the income statement of Sosa Corporation.

E4-11 (Condensed Income Statement—Periodic Inventory Method) Presented below are selected ledger

accounts of Woods Corporation at December 31, 2015.

Cash $ 185,000 Salaries and wages expense (sales) $284,000 Inventory (beginning) 535,000 Salaries and wages expense (offi ce) 346,000 Sales revenue 4,175,000 Purchase returns 15,000 Unearned sales revenue 117,000 Sales returns and allowance 79,000

Sales discounts 34,000 Accounts receivable 142,500 Purchase discounts 27,000 Sales commissions 83,000 Selling expenses 69,000 Telephone and Internet expense (sales) 17,000 Accounting and legal services 33,000 Utilities expense (offi ce) 32,000 Insurance expense (offi ce) 24,000 Miscellaneous offi ce expenses 8,000 Advertising expense 54,000 Rent revenue 240,000 Delivery expense 93,000 Loss on sale of division 60,000

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Instructions

Prepare a 2015 income statement for Woods Corporation.

E4-12 (Retained Earnings Statement) McEntire Corporation began operations on January 1, 2012 During its first 3 years of operations, McEntire reported net income and declared dividends as follows.

Net income Dividends declared

2012 $ 40,000 $ –0–

2013 125,000 50,000

2014 160,000 50,000 The following information relates to 2015.

Prior period adjustment: understatement of 2013 depreciation expense (before taxes) $ 25,000 Cumulative decrease in income from change in inventory methods (before taxes) $ 45,000 Dividends declared (of this amount, $25,000 will be paid on Jan 15, 2016) $100,000

Instructions

(a) Prepare a 2015 retained earnings statement for McEntire Corporation.

(b) Assume McEntire Corp restricted retained earnings in the amount of $70,000 on December 31,

2015 After this action, what would McEntire report as total retained earnings in its December 31,

2015, statement of financial position?

E4-13 (Earnings per Share) At December 31, 2014, Schroeder Corporation had the following shares outstanding.

8% cumulative preference shares, €100 par, 107,500 shares €10,750,000 Ordinary shares, €5 par, 4,000,000 shares 20,000,000 During 2015, Schroeder did not issue any additional shares The following also occurred during 2015.

Income before income tax €21,650,000 Discontinued operations (loss before taxes) 3,225,000 Preference dividends declared 860,000 Ordinary dividends declared 2,200,000

Year Weighted-Average FIFO

2013 $370,000 $395,000

2014 390,000 420,000

2015 410,000 460,000

Instructions

(a) What is Zehms’s net income in 2015? Assume a 35% tax rate in all years.

(b) Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing.

(c) Show comparative income statements for Zehms Company, beginning with income before income tax, as presented on the 2015 income statement.

E4-15 (Comprehensive Income) Gaertner Corporation reported the following for 2015: net sales

€1,200,000, cost of goods sold €720,000, selling and administrative expenses €320,000, and an unrealized holding gain on non-trading equity securities €15,000.

Instructions

Prepare a statement of comprehensive income, using the two statement format Ignore income taxes and earnings per share.

E4-16 (Comprehensive Income) Bryant Co reports the following information for 2015: sales revenue

£750,000, cost of goods sold £500,000, operating expenses £80,000, and an unrealized holding loss on trading equity securities for 2015 of £50,000 It declared and paid a cash dividend of £10,000 in 2015.

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Prepare a statement of changes in equity.

E4-17 (Various Reporting Formats) The following information was taken from the records of Vega Inc

for the year 2015: income tax applicable to income from continuing operations R$119,000, income tax

ap-plicable to loss on discontinued operations R$25,500, and unrealized holding gain on non-trading equity

securities R$15,000.

Gain on sale of plant assets R$ 95,000 Cash dividends declared R$ 150,000 Loss on discontinued operations 75,000 Retained earnings January 1, 2015 600,000 Administrative expenses 240,000 Cost of goods sold 850,000 Rent revenue 40,000 Selling expenses 300,000 Loss on impairment of land 60,000 Sales revenue 1,700,000 Ordinary shares outstanding during 2015 were 100,000.

Instructions

(a) Prepare a comprehensive income statement for 2015 using the one statement approach.

(b) Prepare a retained earnings statement for 2015.

E4-18 (Changes in Equity) The equity section of Hasbro Inc at January 1, 2015, was as follows.

Accumulated other comprehensive income Unrealized holding gain on non-trading equity securities 50,000

During the year, the company had the following transactions.

1 Issued 10,000 shares at $3 per share.

2 Dividends of $9,000 were declared and paid.

3 Net income for the year was $100,000.

4 Unrealized holding loss of $5,000 occurred on its non-trading equity securities.

P4-1 (Income Components) Presented below are financial statement classifications for the statement of

comprehensive income and the retained earnings statement For each transaction or account title, enter in

the space provided a letter(s) to indicate the usual classification.

Statement of Comprehensive Income Retained Earnings Statement

A Revenue F An addition or deduction from beginning balance

B Operating expense G Additions to retained earnings

C Other income or expense H Deduction from retained earnings

D Discontinued operations I Note classifi cation

E Other comprehensive income

Transactions

1 Unrealized holding loss on non-trading equity securities.

2 Gain on sale of non-trading equity securities.

3 Sales revenue.

4 Loss on impairment of goodwill.

5 Sales salaries accrued.

6 Net income for the period.

7 Loss on sale of investments.

8 Depreciation on equipment used in operations.

9 Cash dividends declared and paid.

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P R O B L E M S

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P4-2 (Income Statement, Retained Earnings) Presented below is information related to Dickinson Company

Gain on the sale of investments 110,000

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 ordinary shares 250,000 Dividends declared on preference shares 80,000

Instructions

Prepare an income statement and a retained earnings statement Dickinson Company decided to discontinue

its entire wholesale operations and to retain its manufacturing operations On September 15, Dickinson sold

the wholesale operations to Rogers Company During 2015, there were 500,000 ordinary shares outstanding

all year.

P4-3 (Income Statement, Retained Earnings, Periodic Inventory) Presented below is the trial balance

of Thompson Corporation at December 31, 2015.

Accumulated Depreciation—Buildings 19,600 Inventory 89,000

Buildings 98,000 Purchases 610,000

A physical count of inventory on December 31 resulted in an inventory amount of £64,000; thus, cost of

goods sold for 2015 is £645,000.

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Problems 171

Instructions

Prepare an 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 ordinary shares

were outstanding the entire year.

P4-4 (Income Statement Items) Maher Inc reported income before income tax during 2015 of €790,000

Additional transactions occurring in 2015 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 2013, the corporation purchased a machine for €54,000 (residual value of €9,000) that

had a useful life of 6 years The bookkeeper used straight-line depreciation for 2013, 2014, and 2015 but failed to deduct the residual value in computing the depreciation base.

3. Sale of securities held as a part of its portfolio resulted in a gain of €47,000.

4. 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.

5. 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 2013 income by €60,000 and decrease

2014 income by €20,000 before taxes The FIFO method has been used for 2015.

Instructions

Prepare an income statement for the year 2015, starting with income before income tax Compute earnings

per share as it should be shown on the face of the income statement Ordinary shares outstanding for the

year are 120,000 shares (Assume a tax rate of 30% on all items.)

P4-5 (Income Statement, Retained Earnings) The following account balances were included in the trial

balance of Twain Corporation at June 30, 2015.

Sales revenue $1,578,500 Depreciation expense (offi ce furniture

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 expense

Travel expense (salespersons) 28,930 (administration) 9,130

Entertainment expense 14,820 Sales returns and allowances 62,300

Telephone and Internet expense Dividend revenue 38,000

Depreciation expense (sales Income tax expense 102,000

equipment) 4,980 Depreciation understatement

Maintenance and repairs expense (sales) 6,200 due to error—2013 17,700

Miscellaneous selling expenses 4,715 Dividends declared on

Telephone and Internet expense Dividends declared on

The Retained Earnings account had a balance of $337,000 at July 1, 2014 There are 80,000 ordinary shares outstanding.

Instructions

Prepare an income statement and a retained earnings statement for the year ended June 30, 2015.

P4-6 (Statement Presentation) Presented below is a combined income and retained earnings statement

for Sapporo Company for 2015 (amounts in thousands).

Costs and expenses

Selling, general, and administrative expenses 66,000

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Additional facts are as follows.

1. “Selling, general, and administrative expenses” for 2015 included a charge of ¥8,500,000 for ment of intangibles.

2. “Other, net” for 2015 was a loss on sale of equipment of ¥17,000,000.

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. Sapporo Company disclosed earnings per 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 Sapporo Company come 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.)

in-P4-7 (Retained Earnings Statement, Prior Period Adjustment) The following is the retained earnings account for the year 2015 for Acadian Corp.

Retained earnings, January 1, 2015 $257,600 Add:

Gain on sale of investments $41,200

Loss on discontinued operations 35,000

Cumulative effect on income of prior years in changing from average-cost to FIFO inventory valuation in 2015 23,200

Retained earnings, December 31, 2015 $280,100

Instructions

(a) Prepare a corrected retained earnings statement (Ignore income tax effects.) FIFO inventory was used in 2015 to compute net income.

(b) State where the items that do not appear in the corrected retained earnings statement should be shown.

P4-8 (Income Statement) Wade Corp has 150,000 ordinary shares of outstanding In 2015, the company reports income before income tax of €1,210,000 Additional transactions not considered in the €1,210,000 are as follows.

1. In 2015, Wade Corp sold equipment for €40,000 The machine had originally cost €80,000 and had accumulated depreciation of €30,000.

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 had a gain of €125,000 on the condemnation of much of its property.

Instructions

Analyze the above information and prepare an income statement for the year 2015, starting with income 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 20% on all items.)

2015 The accountant for O’Malley Corporation provides you with the following income statement, which O’Malley plans to submit to the bank.

C O N C E P T S F O R A N A LY S I S

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Concepts for Analysis 173

Instructions

Indicate the deficiencies in the income statement presented.

CA4-2 (Earnings Management) Bobek Inc has recently reported steadily increasing income The

com-pany reported income of €20,000 in 2012, €25,000 in 2013, and €30,000 in 2014 A number of market analysts

have recommended that investors buy Bobek shares because the analysts expect the steady growth in

income to continue Bobek is approaching the end of its fiscal year in 2015, and it again appears to be a

good year However, it has not yet recorded warranty expense.

Based on prior experience, this year’s warranty expense should be around €5,000, but some managers

have approached the controller to suggest a larger, more conservative warranty expense should be

re-corded this year Income before warranty expense is €43,000 Specifically, by recording a €7,000 warranty

accrual this year, Bobek could report an increase in income for this year and still be in a position to cover

its warranty costs in future years.

Instructions

(a) What is earnings management?

(b) Assume income before warranty expense is €43,000 for both 2015 and 2016 and that total warranty

expense over the 2-year period is €10,000 What is the effect of the proposed accounting in 2015?

In 2016?

(c) What is the appropriate accounting in this situation?

CA4-3 (Earnings Management) Charlie Brown, controller for Kelly Corporation, is preparing the

company’s income statement at year-end He notes that the company lost a considerable sum on the sale

of some equipment it had decided to replace Brown does not want to highlight it as a material loss since

he feels that will reflect poorly on him and the company He reasons that if the company had recorded more

depreciation during the assets’ lives, the losses would not be so great Since depreciation is included among

the company’s operating expenses, he wants to report the losses along with the company’s expenses, where

he hopes it will not be noticed.

Instructions

(a) What are the ethical issues involved?

(b) What should Brown do?

CA4-4 (Income Reporting Items) Simpson Corp is an entertainment firm that derives approximately

30% of its income from the Casino Knights Division, which manages gambling facilities As auditor for

Simpson Corp., you have recently overheard the following discussion between the controller and financial

Loss on obsolescence of inventories 34,000

Loss on discontinued operations 48,600

Administrative expenses 73,400 780,800

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Controller: IFRS would require that we disclose this information more fully in the income

statement as a gain on discontinued operations.

Vice President: What about the walkout we had last month when employees were upset about

their commission income? We had a loss as a result of this walkout.

Controller: I am not sure where this item would be reported.

Vice President: Oh well, it doesn’t make any difference because the net effect of all these items

is immaterial, so no disclosure is necessary.

Instructions

(a) On the basis of the foregoing discussion, answer the following questions: Who is correct about handling the sale? What would be the correct income statement presentation for the sale of the Casino Knights Division?

(b) How should the walkout by the employees be reported?

(c) What do you think about the vice president’s observation on materiality?

(d) What are the earnings per share implications of these topics?

CA4-5 (Identification of Income Statement Weaknesses) The following financial statement was pared by employees of Walters Corporation.

Delivery expense and freight-in 3,400

Total costs and expenses 576,700 Income before unusual items 455,500 Unusual items

Loss on discontinued styles (Note 1) 71,500 Loss on sale of marketable securities (Note 2) 39,050 Loss on sale of warehouse (Note 3) 86,350

Net income per ordinary share £2.30

Note 1: New styles and rapidly changing consumer preferences resulted in a £71,500 loss on the disposal of

discontinued styles and related accessories.

Note 2: The corporation sold an investment in marketable securities at a loss of £39,050 The corporation normally

sells securities of this nature.

Note 3: The corporation sold one of its warehouses at an £86,350 loss.

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Using Your Judgment 175

CA4-6 (Classification of Income Statement Items) As audit partner for Grupo and Rijo, you are in charge

of reviewing the classification of unusual items that have occurred during the current year The following

material items have come to your attention.

1 A merchandising company incorrectly overstated its ending inventory 2 years ago Inventory for all

other periods is correctly computed.

2 An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased for

$21,000 10 years ago The Invicta is the only such display item the dealer owns.

3. A drilling company during the current year extended the estimated useful life of certain drilling

equip-ment from 9 to 15 years As a result, depreciation for the current year was materially lowered.

4. A retail outlet changed its computation for bad debt expense from 1% to 1 ⁄ 2 of 1% of sales because of

changes in its customer clientele.

5. A mining concern sells a foreign subsidiary engaged in uranium mining It is the only uranium mine

the company has.

6. A steel company changes from the average-cost method to the FIFO method for inventory costing

9. Depreciation for a prior period was incorrectly understated by $950,000 The error was discovered in

the current year.

10. A large sheep rancher suffered a major loss because the state required that all sheep in the state

be killed to halt the spread of a rare disease Such a situation has not occurred in the state for

20 years.

11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two

distin-guishable classes of customers) decides to discontinue the division that sells to one of the two classes

of customers.

Instructions

From the foregoing information, indicate in what section of the income statement or retained earnings

statement these items should be classified Provide a brief rationale for your position.

CA4-7 (Comprehensive Income) Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the

company’s financial statements at year-end Currently, he is focusing on the income statement and

deter-mining the format for reporting comprehensive income During the year, the company earned net income

of $400,000 and had unrealized gains on non-trading equity securities of $15,000 In the previous year, net

income was $410,000, and the company had no unrealized gains or losses.

Instructions

(a) Show how income and comprehensive income will be reported on a comparative basis for the

current and prior years, using the separate income statement format.

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-1

STARR CO

Income Statement For the Year 2015 Sales Revenue £540,000 Cost of goods sold

Gross profit

330,000 210,000 Selling expenses £120,000

Administrative expenses 10,000

Income before income tax

130,000 80,000 Income tax

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BRISKY CORPORATION Income Statement For the Year Ended December 31, 2015 Net sales $2,400,000 Cost of goods sold

Gross profit

1,450,000 950,000 Selling expenses $280,000

Administrative expenses 212,000 492,000 Other income and expense

Interest revenue

Income from operations

31,000 489,000 Interest expense

45,000 444,000 Income tax ($444,000 X 30%)

Net income

133,200

$ 310,800 Earnings per share $4.44*

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1 Income from operations

2 Income before income tax

3 Income from operations

Loss from operation of discontinued

restaurant division (net of tax) £315,000

Loss from disposal of restaurant division

(net of tax) 189,000

Net income

(504,000) £10,096,000 Earnings per share

Income from continuing operations £1.06 Discontinued operations, net of tax (0.05 Net income

)*

£1.01

*Rounded

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2015 2014 Income before income tax

Vandross would not report any cumulative effect because a change in estimate

is not handled retrospectively Vandross would report bad debt expense of

€120,000 in 2015

$1,000,000 – $250,000

= $3.95 per share 190,000

TSUI CORPORATION Retained Earnings Statement For the Year Ended December 31, 2015 Retained earnings, January 1 NT$ 675,000 Add: Net income 1,400,000

2,075,000 Less: Cash dividends

Retained earnings, December 31

75,000 NT$2,000,000

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TSUI CORPORATION Retained Earnings Statement For the Year Ended December 31, 2015 Retained earnings, January 1, as reported NT$ 675,000 Correction for overstatement of expenses in

prior period (net of tax)

Retained earnings, January 1, as adjusted

80,000

755,000 Add: Net income 1,400,000

2,155,000 Less: Cash dividends

Retained earnings, December 31

75,000 NT$2,080,000

(c) Unrealized holding gain

(Other comprehensive income) ¥4,000,000

(d) Accumulated other comprehensive income,

January 1, 2015 ¥ 0 Unrealized holding gain

Accumulated other comprehensive income,

December 31, 2015

4,000,000

¥4,000,000

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SOLUTIONS TO EXERCISES

EXERCISE 4-1 (10–15 minutes)

Sales revenue €310,000 Cost of goods sold 140,000 Gross profit 170,000 Selling and administrative expenses 50,000 Other income and expense

Gain on sale of plant assets 30,000 Income from operations 150,000(a) Interest expense 6,000 Income from continuing operations 144,000 Loss on discontinued operations (12,000) Net income 132,000(b) Allocation to non-controlling interest (40,000) Net income attributable to controlling shareholders € 92,000(c)

Net income €132,000 Unrealized gain on non-trading equity securities 10,000 Comprehensive income €142,000(d)

Net income €132,000 Dividends declared and paid (5,000

Computation of net income

) Retained earnings December 31, 2015 €127,000(e)

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dividend declaration (24,000 ) Net increase accounted for

Increase in retained earnings due to net

Sales returns 12,400 20,200 Net sales 379,800 Dividend revenue 71,000 Rental revenue 6,500

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EXERCISE 4-3 (Continued)

(c) Dividends declared:

Net increase 19,600 Less: Net income (from (b)) 51,700 Dividends declared $ 32,100

ALTERNATE SOLUTION (for (c))

Beginning retained earnings $114,400 Add: Net income 51,700

166,100 Less: Dividends declared ? Ending retained earnings $134,000

Dividends declared must be $32,100

($166,100 – $134,000)

DUNBAR INC

Income Statement For Year Ended December 31, 2015 Net sales ($1,125,000 (b) – $17,000) $1,108,000 Cost of goods sold

Gross profit

500,000 608,000 Selling expenses $360,000 (c)

Administrative expenses 90,000 (a)

20,000 138,000 Income tax

Net income

41,400 $ 96,600 Earnings per share (d) $3.22*

*Rounded

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(c) Selling expenses = four times administrative expenses

(since selling expenses are 4/5

of selling and administrative expenses, selling expenses are

4 times administrative expenses.)

= 4 X $90,000

= $360,000

(d) Earnings per share $3.22 ($96,600 ÷ 30,000)

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WEBSTER COMPANY Income Statement For the Year Ended December 31, 2015 (In thousands, except earnings per share) Sales revenue £96,500 Cost of goods sold

Gross profit

63,570 32,930 Selling expenses

1,860 22,290 Income tax

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PARNEVIK CORP

Income Statement For the Year Ended December 31, 2015 Revenue

Sales revenue €1,280,000 Less: Sales returns and allowances €150,000

Sales discounts 45,000

Net sales revenue

195,000 1,085,000 Cost of goods sold

Gross profit

621,000 464,000

) 139,000 Interest expense

60,000 79,000 Income tax (€79,000 X 34)

Net income

26,860 € 52,140

Earnings per share (€52,140 ÷ 100,000) €52*

*Rounded

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Statement of Comprehensive Income For the Year Ended December 31, 2015 Net sales £980,000 Cost of goods sold

Gross profit

516,000 464,000

Selling expenses £140,000

Administrative expenses 181,000 321,000 Other income and expense

Rent revenue 29,000

Loss on sale of plant assets (15,000)

18,000 139,000 Income tax

Net income

30,600 108,400 Other Comprehensive income

Unrealized gain on securities, net of tax

Comprehensive income

31,000

£139,400 Earnings per share (£108,400 ÷ 20,000) £.92

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EXERCISE 4-7 (Continued)

Income Statement For the Year Ended December 31, 2015 Net sales £980,000 Cost of goods sold

Gross profit

516,000 464,000 Selling expenses £140,000

Administrative expenses 181,000 321,000

143,000 Other income and expense

Rent revenue 29,000

Loss on sale of plant assets (15,000)

18,000 139,000 Income tax

Net income

30,600

£108,400 Earnings per share (£108,400 ÷ 20,000) £.92

WEATHERSPOON SHOE CO

Comprehensive Income Statement For the Year Ended December 31, 2015 Net income £108,400 Other comprehensive income

Unrealized gain on securities, net of tax

Comprehensive income

31,000

£139,400

(c) The combined statement has the advantage of not requiring the creation

of a new financial statement However, burying net income as a subtotal

on the statement is considered a disadvantage

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(a) Net sales € 540,000 Less: Cost of goods sold (260,000) Administrative expenses (100,000) Selling expenses (80,000) Discontinued operations-loss (40,000)

Income tax (€60,000 X 30) 18,000 Net income € 42,000

(b) Income before income tax €100,000* Income tax (€100,000 X 30) 30,000 Income from continuing operations 70,000 Discontinued operations, less applicable

income tax of €12,000 (28,000) Net income € 42,000 *€60,000 + €40,000

Earnings per share:

Income from continuing operations

(€70,000 ÷ 20,000) € 3.50 Loss on discontinued operations, net of tax (1.40) Net income (€42,000 ÷ 20,000) € 2.10

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