BUS312A/612A
Financial Reporting I
Homework 9.17.2014 & 9.22.2014
Statements of Income and Retained Earnings
Chapter 4
E4-2 (Income Statement Items) Presented below are certain account balances of Viel Co. at
December 31, 2014, the end of its first year of operations.
Sales revenue
Cost of goods sold
Selling & Admin. Expenses
Gain on sale of plant assets
Unrealized gain on
available-for-sale investments
$310,000
140,000
50,000
30,000
Interest expense
$ 6,000
Loss on discontinued operations
12,000
Allocation to noncontrolling interest 40,000
Dividends declared and paid
5,000
10,000
Compute the following: (a) income from operations, (b) net income, (c) net income attributable to
Viel Company’s controlling shareholders, (d) comprehensive income, and (e) retained earnings
balance at December 31, 2014.
Alt. E4-3 (Income Statement Items) Presented below are certain account balances of Paczki
Products Co.
Rental revenue
$ 6,500
Interest expense
12,700
Beginning retained earning
114,400
Ending retained earnings
134,000
Dividend revenue
71,000
Sales returns
12,400
Allocation to noncontrolling interest 17,000
Sales discounts
Selling expenses
Sales revenue
Income tax expense
Cost of goods sold
Administrative expenses
$ 7,800
99,400
390,000
31,000
184,400
82,500
From the foregoing, compute the following: (a) total net revenue, (b) net income, (c) dividends
declared during the current year, and income attributable to controlling stockholders.
E4-4 Single step Income Statement
Fire destroyed L Jones Inc. financial records.
Prepare an income statement for 2014 in singlestep form using the data the controller kept.
1.
The beginning merchandise inventory was
$92,000 and decreased 20% during the
current year.
2.
Sales discounts amount to $17,000.
3.
20,000 shares of common stock were
outstanding the entire year.
4.
Interest expense was $20,000 for the year.
5.
The income tax rate is 30%.
6.
Cost of goods sold amounts to $500,000.
7.
Administrative expenses are 20% of cost of
goods sold but only 8% of gross sales.
8.
Four-fifths of the operating expenses
relate to sales activities.
P3-6 Adjusting Entries and Financial Statements
Cash
Accounts Receivable
49,600
Allowance for Bad Debts
$
Inventory
1,960
Prepaid Insurance
1,100
Equipment
1.
$29,500
750
3.
4.
25,000
Accumulated DepreciationEquipment
6,250
Notes Payable
7,200
Owner’s Capital
35,010
Service Revenue
100,000
Rent Expense
Salaries and Wages Expense
Utilities Expense
Office Expense
2.
5.
6.
7.
9,750
30,500
1,080
8.
720
$149,210
$149,210
Fees received in advance from
clients $6,000.
Services performed for clients
that were not recorded by
December 31, $4,900.
Bad debt expense for the year
$1,430.
Insurance expired during the
year $480.
Equipment is being depreciated
at 10% per year.
Perez gave bank a 90 day, 10%
note for $7,200 on December
1, 2014.
Rent of the building is $750 per
month. The rent for 2014 has
been paid, as has that for
January 2015.
Office salaries and wages
earned but unpaid at
December 31 , $2,510.
1.
Fees received in advance from clients $6,000.
2.
Services performed for clients that were not recorded by December 31, $4,900.
3.
Bad debt expense for the year $1,430.
4.
Insurance expired during the year $480.
5.
Equipment is being depreciated at 10% per year.
6.
Perez gave bank a 90 day, 10% note for $7,200 on December 1, 2014.
7.
Rent of the building is $750 per month. The rent for 2014 has been paid, as has that for January 2015.
8.
Office salaries and wages earned but unpaid at December 31 , $2,510.
E4-5 (Multiple-step and Single-step) 2014 information for P. Bride Co. ($000 omitted).
Administrative expense
Officers’ salaries
Depreciation of furniture and equipment
Cost of goods sold
Rental revenue
Selling expense
Delivery expense
Sales commissions
Depreciation of sales equipment
Sales revenue
Income tax expense
Interest expense
$ 4,900
3,960
60,570
17,230
2,690
7,980
6,480
96,500
9,070
1,860
a)
b)
Multiple-step income statement for 2014. Shares outstanding = 40,550 ($000 omitted).
Single-step income statement for 2014.
c)
Which one is best? Discuss.
Alt. E4-6 (Multiple-step and Extraordinary Items) The following balances were
taken from the books of MCA Corp. on December 31, 2014.
Interest revenue
Cash
Sales
Accounts receivable
Prepaid Insurance
Sales returns and allowances
Allowance for doubtful
accounts
Sales discounts
Land
Equipment
Building
Cost of goods sold
$
86,000
51,000
1,380,000
150,000
20,000
150,000
7,000
45,000
100,000
200,000
140,000
621,000
Accumulated depreciation-equipment
Accumulated depreciation-building
Notes receivable
Selling expenses
Accounts payable
Bonds payable
Administrative and general
expenses
Accrued liabilities
Interest expense
Notes payable
Loss from earthquake damage
(extraordinary item)
Common stock
Retained earnings
$ 40,000
28,000
155,000
194,000
170,000
100,000
97,000
32,000
60,000
100,000
150,000
500,000
21,000
Assume the total effective tax rate on all items is 34%.
Prepare a multiple-step income statement; 100,000 shares of common stock outstanding
during the year.
E4-14 (Change in Accounting Principle)
Tim Mattke Company began operations in 2012 and for simplicity reasons, adopted
weighted-average pricing for inventory. In 2014, in accordance with other companies
in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is
reported below.
Year
EBIT
Weighted-Average
EBIT
FIFO
2012
$370,000
$395,000
2013
390,000
430,000
2014
410,000
450,000
Instructions
(a) What is Mattke’s net income for 2014? Assume a 35% tax rate in all years.
(b) Compute the cumulative effect of the change in accounting principle.
(c) Show the comparative income statements for the company, beginning with
income before income tax, as presented on the 2014 income statement.
E4-15 (Comprehensive Income) Carter Corporation reported the following for 2014: net sales
$1,200,000; cost of goods sold $750,000; selling and administrative expenses $320,000; unrealized
holding gain on available-for sale securities $18,000.
Prepare a statement of comprehensive income, using (a) the one statement format, and (b) the two
statement format. Ignore income taxes and earnings per share).
Alt. E4-16 (Comprehensive Income) Reither Co. reports the following for 2014: sales revenue $700,000; COGS
$500,000; operating expenses $80,000; and an unrealized holding loss on available-for-sale securities of $60,000.
It declared and paid a cash dividend of $10,000 in 2014.
January 1, 2014 balances in common stock $350,000; accumulated other comprehensive income $80,000;
retained earnings $90,000. No stock issued in 2014.
Alt. CA4-6 (Classification of Income Statement Items) What section of the income statement
or retained earnings statement should these items be classified? Explain.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
A merchandising company incorrectly overstated its ending inventory two years ago.
Inventory for all other periods is correctly computed.
An automobile dealer sells for $137,000 a 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.
A drilling company extended the estimated useful life of drilling equipment from 9 to 15
years. As a result, depreciation for the current year was materially lowered.
A retail outlet changed its computation for bad debt expense from 1% to .5% of sales
because of changes in its customer clientele.
A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the
seller) continues to engage in uranium mining in other countries.
A steel company changes from the average-cost to FIFO inventory costing.
A company, at great expense, prepared a major proposal for a government loan, which is
not approved.
A water pump manufacturer has had large losses resulting from a strike by its employees
early in the year.
Depreciation for a prior period was incorrectly understated by $950,000. The error was
discovered in the current year.
A sheep rancher suffered a major loss because the state required that all sheep be killed to
halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.
A food distributor that sells to supermarket chains and fast-food restaurants (two
distinguishable classes of customers) decides to discontinue the division that sells to
supermarkets.
CA4-3 (Earnings Management)
The controller for Kelly Corporation is preparing the company’s income
statement at year-end. He notes that the company has lost a considerable
sum on the sale of some equipment it had decided to replace. Since the
company has sold equipment routinely in the past, he knows the losses
cannot be reported as extraordinary. He 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 expenses, where he hopes it will not be noticed.
Instructions
(a) What are the ethical issues involved?
(b) What should the controller do?
Classification in the Balance Sheet
Question
The correct order to present current assets is
a. Cash, accounts receivable, prepaid items, inventories.
b. Cash, accounts receivable, inventories, prepaid items.
c. Cash, inventories, accounts receivable, prepaid items.
d. Cash, inventories, prepaid items, accounts receivable.
Order of Liquidity
Statement of Cash Flows
Question
In preparing a statement of cash flows, which of the following
transactions would be considered an investing activity?
a.
Sale of equipment at book value
b.
Sale of merchandise on credit
c.
Declaration of a cash dividend
d.
Issuance of bonds payable at a discount receivable.
IFRS SELF-TEST QUESTION
Current assets under IFRS are listed generally:
a. by importance.
b. in the reverse order of their expected conversion to cash.
c.
by longevity.
d. alphabetically.
IFRS SELF-TEST QUESTION
Companies that use IFRS:
a. may report all their assets on the statement of financial position
at fair value.
b. are not allowed to net assets (assets 2 liabilities) on their
statement of financial positions.
c.
may report noncurrent assets before current assets on the
statement of financial position.
d. do not have any guidelines as to what should be reported on the
statement of financial position.
IFRS SELF-TEST QUESTION
A company has purchased a tract of land and expects to build a
production plant on the land in approximately 5 years. During the 5
years before construction, the land will be idle. Under IFRS, the land
should be reported as:
a. land expense.
b. property, plant, and equipment.
c.
an intangible asset.
d. a long-term investment.