EXERCISE 4-2
(a) Total net revenue:
Sales
Less: Sales discounts
Sales returns
Net sales
Dividend revenue
Rental revenue
Total net revenue
(b) Net income:
Total net revenue (from a)
Expenses:
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Income before income tax
Income tax
Net income
(c) Dividends declared:
Ending retained earnings
Beginning retained earnings
Net increase
Less: Net income
Dividends declared
$390,000
$ 7,800
12,400
20,200
369,800
71,000
6,500
$447,300
$447,300
184,400
99,400
82,500
12,700
379,000
68,300
31,000
$ 37,300
$134,000
114,400
19,600
(37,300)
$ 17,700
EXERCISE 4-2 (Continued)
ALTERNATE SOLUTION
Beginning retained earnings
Add: Net income
$114,400
37,300
151,700
?
$134,000
Less: Dividends declared
Ending retained earnings
Dividends declared must be $17,700
($151,700 – $134,000)
EXERCISE 4-3
LeRoi Jones Inc.
Income Statement
For Year Ended December 31, 2007
Revenues
Net sales ($1,250,000(b) – $17,000) ........................
Expenses
Cost of goods sold ................................................
Selling expenses....................................................
Administrative expenses .......................................
Interest expense ....................................................
Total expenses ..............................................
Income before income tax ...............................................
Income tax ..............................................................
Net income .......................................................................
Earnings per share ...........................................................
*Rounded
$1,233,000
500,000
400,000(c)
100,000(a)
20,000
1,020,000
213,000
63,900
$ 149,100
$
7.46*
EXERCISE 4-3 (Continued)
Determination of amounts
(a)
Administrative expenses
= 20% of cost of good sold
= 20% of $500,000
= $100,000
(b)
Gross sales X 8%
= administrative expenses
= $100,000 ÷ 8%
= $1,250,000
(c)
Selling expenses
= four times administrative expenses.
(operating expenses consist of selling
and administrative expenses; since
selling expenses are 4/5 of operating
expenses, selling expenses are 4
times administrative expenses.)
= 4 X $100,000
= $400,000
Earnings per share $7.46 ($149,100 ÷ 20,000)
Note: An alternative income statement format is to show income
tax a part of expenses, and not as a separate item. In this case,
total expenses are $1,083,900.
EXERCISE 4-4
(a)
Multiple-Step Form
P. Bride Company
Income Statement
For the Year Ended December 31, 2007
(In thousands, except earnings per share)
Sales....................................................................
Cost of goods sold .............................................
Gross profit on sales .........................................
$96,500
60,570
35,930
Operating Expenses
Selling expenses
Sales commissions ................................ $7,980
Depr. of sales equipment ....................... 6,480
Transportation-out ................................. 2,690
Administrative expenses
Officers’ salaries .................................... 4,900
Depr. of office furn. and equip. .............. 3,960
Income from operations ...................
Other Revenues and Gains
Rental revenue..............................................
$17,150
8,860
26,010
9,920
17,230
27,150
Other Expenses and Losses
Interest expense ...........................................
1,860
Income before income tax .................................
Income tax ....................................................
Net income ..........................................................
25,290
9,070
$16,220
Earnings per share ($16,220 ÷ 40,550) ..............
(b)
$.40
Single-Step Form
P. Bride Company
Income Statement
For the Year Ended December 31, 2007
(In thousands, except earnings per share)
Revenues
Net sales ...........................................................................
Rental revenue ..................................................................
Total revenues ............................................................
$ 96,500
17,230
113,730
Expenses
Cost of goods sold ...........................................................
Selling expenses ..............................................................
Administrative expenses .................................................
Interest expense ...............................................................
Total expenses............................................................
60,570
17,150
8,860
1,860
88,440
Income before income tax .....................................................
Income tax ..............................................................................
Net income ........................................................................
25,290
9,070
$ 16,220
Earnings per share .................................................................
$.40
Note: An alternative income statement format for the single-step
form is to show income tax a part of expenses, and not as a
separate item.
(c)
Single-step:
1.
Simplicity and conciseness.
2.
3.
4.
Probably better understood by users.
Emphasis on total costs and expenses and net
income.
Does not imply priority of one revenue or expense
over another.
Multiple-step:
1.
Provides more information through segregation of
operating and nonoperating items.
2.
Expenses are matched with related revenue.
EXERCISE 4-5
Maria Conchita Alonzo Corp.
Income Statement
For the Year Ended December 31, 2007
Sales Revenue
Sales ..........................................................................
Less: Sales returns and allowances ....................... $150,000
Sales discounts .............................................
45,000
Net sales revenue .....................................................
Cost of goods sold ...................................................
Gross profit on sales .....................................................
$1,380,000
195,000
1,185,000
621,000
564,000
Operating Expenses
Selling expenses ...................................................
Admin. and general expenses ..............................
Income from operations.................................................
194,000
97,000
291,000
273,000
EXERCISE 4-5 (Continued)
Other Revenues and Gains
Interest revenue .......................................................
86,000
359,000
Other Expenses and Losses
Interest expense ......................................................
Income before tax and extraordinary item ....................
Income tax ($299,000 X .34) ....................................
Income before extraordinary item ..................................
Extraordinary item—loss from earthquake damage ..........
Less: Applicable tax reduction ($150,000 X .34) ........
Net income.......................................................................
Per share of common stock:
Income before extraordinary item
($197,340 ÷ 100,000) ................................................
Extraordinary item (net of tax) ...................................
Net income ($98,340 ÷ 100,000) .................................
*Rounded
60,000
299,000
101,660
197,340
150,000
51,000
$
99,000
98,340
$1.97*
(.99)
$ .98
EXERCISE 4-7
(a) Net sales
Less: Cost of goods sold
Administrative expenses
Selling expenses
Discontinued operations-loss
Income before income tax
Income tax ($110,000 X .30)
Net income
(b) Income from continuing operations before income tax
Income tax ($150,000 X .30)
Income from continuing operations
Discontinued operations, less applicable income tax of
$12,000
Net income
$ 540,000
(210,000)
(100,000)
(80,000)
(40,000)
110,000
33,000
$ 77,000
$150,000*
45,000
105,000
(28,000)
$ 77,000
*$110,000 + $40,000
Earnings per share:
Income from continuing operations ($105,000 ÷ 10,000)
Loss on discontinued operations, net of tax
Net Income ($77,000 ÷ 10,000)
$10.50
(2.80)
$ 7.70
EXERCISE 4-9
Computation of net income:
2007 net income after tax ............................................................$33,000,000
2007 net income before tax
[$33,000,000 ÷ (1 – .34)] ........................................................... 50,000,000
Add back major casualty loss .................................................... 18,000,000
Income from operations ........................................................ 68,000,000
Income taxes (34% X $68,000,000) ............................................. 23,120,000
Income before extraordinary item .............................................. 44,880,000
Extraordinary item:
Casualty loss .........................................................................
$18,000,000
Less: Applicable income tax reduction ....................................
6,120,000
11,880,000
Net income ...................................................................................$33,000,000
EXERCISE 4-9 (Continued)
Net income .........................................................................................
$33,000,000
Less: Provision for preferred dividends
(8% of $4,500,000) ................................................................... 360,000
Income available to common stockholders...............................32,640,000
Common stock shares ................................................................
÷10,000,000
Earnings per share ......................................................................
$3.26*
Income statement presentation
Per share of common stock:
Income before extraordinary item ........................................
Extraordinary item, net of tax ...............................................
Net income .............................................................................
a
$44,880,000 – $360,000
10,000,000
*Rounded
b
= $4.45*
$11,880,000
10,000,000
= $1.19*
$4.45a
(1.19)b
$3.26
EXERCISE 4-12
Net income:
Income from continuing operations
before income tax ....................................................................
$23,650,000
Income tax (35% X $23,650,000) .................................................8,277,500
Income from continuing operations...........................................
15,372,500
Discontinued operations
Loss before income tax.........................................................
$3,225,000
Less: Applicable income tax (35%) ......................................
1,128,750
2,096,250
Net income ...................................................................................
$13,276,250
Preferred dividends declared: ..........................................................
$ 1,075,000
Weighted average common shares outstanding....................................4,000,000
Earnings per share
Income from continuing operations...........................................
Discontinued operations, net of tax ...........................................
Net income ...................................................................................
*($15,372,500 – $1,075,000) ÷ 4,000,000. (Rounded)
**$2,096,250 ÷ 4,000,000. (Rounded)
***($13,276,250 – $1,075,000) ÷ 4,000,000.
$3.57*
(.52)**
$3.05***
EXERCISE 4-13
(a)
2007
$450,000
157,500
$292,500
Income before income tax
Income tax (35%)
Net Income
(b)
Year
2005
2006
Cumulative effect for years prior to 2007.
Weighted
Average
$370,000
390,000
Tax Rate
FIFO
Difference
(35%) Net Effect
$395,000
$25,000
430,000
40,000
Total
$65,000
$22,750
$42,250
(c)
Income before income tax
Income tax (35%)
Net income
2007
2006
2005
$450,000 $430,000 $395,000
157,500 150,500 138,250
$292,500 $279,500 $256,750