CHapter 4A solution

Chapter 04 - The Income Statement and Statement of Cash Flows

4-1

Chapter 4 The Income Statement and Statement of Cash

Flows

Exercise 4-1 (concluded)

Requirement 2

GREEN STAR CORPORATION

Income Statement

For the Year Ended December 31, 2011

Sales revenue ...................................................... $1,300,000

Cost of goods sold .............................................. 720,000

Gross profit ......................................................... 580,000

Operating expenses:

Salaries .............................................................. $160,000

Depreciation ...................................................... 50,000

Rent .................................................................. 25,000

Total operating expenses .............................. 235,000

Operating income ............................................... 345,000

Other income (expense):

Interest revenue ................................................ 30,000

Gain on sale of investments ............................. 50,000

Interest expense ................................................ (40,000)

Total other income, net ................................. 40,000

Income before income taxes .............................. 385,000

Income tax expense ............................................ 130,000

Net income .......................................................... $ 255,000

Earnings per share ..............................................

$2.55


4-2

Exercise 4-2

Requirement 1

GENERAL LIGHTING CORPORATION

Income Statement


Revenues and gains:

Sales ................................................................. $2,350,000

Rental revenue ................................................. 80,000

Total revenues and gains .............................. 2,430,000

Expenses and losses:

Cost of goods sold ........................................... $1,200,300

Salaries ............................................................. 300,000

Depreciation ...................................................... 100,000

Interest ............................................................... 90,000

Rent .................................................................. 50,000

Loss on sale of investments ............................. 22,500

Loss from inventory write-down ..................... 200,000

Income tax expense * ........................................ 186,880

Total expenses and losses ............................. 2,149,680

Income before extraordinary item ......................

Extraordinary item:

Loss from flood damage (net of $48,000 tax benefit)

Net income ..........................................................

280,320

(72,000)

$ 208,320

Earnings per share:


Extraordinary loss ...............................................

Net income ..........................................................

$ .93

(.24)

$ .69

* 40% x $467,200


4-3

Exercise 4-2 (concluded)

Requirement 2

GENERAL LIGHTING CORPORATION

Income Statement


Sales revenue ...................................................... $2,350,000

Cost of goods sold .............................................. 1,200,300

Gross profit ......................................................... 1,149,700

Operating expenses:

Salaries ............................................................. $300,000

Depreciation ..................................................... 100,000

Rent .................................................................. 50,000

Loss from inventory write-down ..................... 200,000

Total operating expenses .............................. 650,000

Operating income ............................................... 499,700


Rental revenue ................................................. 80,000

Loss on sale of investments ............................. (22,500)

Interest expense ................................................ (90,000)

Total other income (expense), net ................ (32,500)

Income before taxes and extraordinary item ...... 467,200

Income tax expense * .......................................... 186,880


Extraordinary item:

Loss from flood damage (net of $48,000 tax benefit)

Net income ..........................................................

280,320

(72,000)

$ 208,320

Earnings per share:


Extraordinary loss ...............................................

Net income ..........................................................

$ .93

(.24)

$ .69

* 40% x $467,200


4-4

Exercise 4-3

LINDOR CORPORATION

Statement of Income and Comprehensive Income


Sales revenue ................................................................... $2,300,000

Cost of goods sold ........................................................... 1,400,000

Gross profit ...................................................................... 900,000

Operating expenses:

Selling and administrative ............................................. 420,000

Operating income ............................................................ 480,000


Interest expense ............................................................... (40,000)

Income before income taxes and extraordinary item ....... 440,000

Income tax expense * ....................................................... 132,000

Income before extraordinary item ....................................

Extraordinary item:

Gain on litigation settlement (net of $120,000

tax expense) ..................................................................

Net income

Other comprehensive income:

Unrealized holding gains on investment securities,

net of tax ....................................................................

Comprehensive income ...................................................

308,000

280,000

588,000

56,000

$644,000

Earnings per share:


Extraordinary gain ...........................................................

Net income .......................................................................

$ 0.31

0.28

$ 0.59

* 30% x $440,000


4-5

Exercise 4-4

AXEL CORPORATION

Income Statement


Sales revenue ................................................................... $ 592,000

Cost of goods sold ........................................................... 325,000

Gross profit ...................................................................... 267,000

Operating expenses:

Selling .......................................................................... $67,000

Administrative ............................................................. 87,000

Restructuring costs ....................................................... 55,000

Total operating expenses ........................................... 209,000

Operating income ............................................................ 58,000


Interest and dividends ...................................................

32,000

Interest expense ............................................................

Total other income, net .................................................

(26,000)

6,000

Income before income taxes and extraordinary item ...... 64,000

Income tax expense* ....................................................... 25,600


Extraordinary item:

Gain on litigation settlement (net of $34,400

tax expense) ..................................................................

Net income .......................................................................

38,400

51,600

$ 90,000

Earnings per share:


Extraordinary gain ...........................................................

Net income .......................................................................

$ .38

.52

$0.90

* 40% x $64,000


4-6

Exercise 4-5

CHANCE COMPANY

Partial Income Statement


Income from continuing operations ................................... $ 350,000

Discontinued operations:

Loss from operations of discontinued component

(including loss on disposal of $400,000)* ................................ (530,000)

Income tax benefit ............................................................ 212,000

Loss on discontinued operations ...................................... (318,000)

Net income ........................................................................... $ 32,000

Earnings per share:

Income from continuing operations ................................... $ 3.50

Loss from discontinued operations .................................... (3.18)

Net income .......................................................................... $ .32

* Loss on discontinued operations:

Loss on sale of assets $(400,000)

Operating loss (130,000)

Total before-tax loss (530,000)

Less: Income tax benefit (40%) 212,000

Net-of-tax loss $(318,000)


4-7

Exercise 4-6

ESQUIRE COMIC BOOK COMPANY



Income from continuing operations * ................................. $ 552,000


Income from operations of discontinued component (including loss on disposal of $350,000) ................................. 150,000

Income tax expense .......................................................... 60,000

Income on discontinued operations .................................. 90,000

Net income ............................................................................ $642,000

* Income from continuing operations:

Income before considering additional items $1,000,000

Decrease in income due to restructuring costs (80,000)

Before-tax income from continuing operations 920,000

Income tax expense (40%) (368,000)

Income from continuing operations $ 552,000


4-8

Exercise 4-7

Requirement 1

KANDON ENTERPRISES, INC.





Loss from operations of discontinued component

(including impairment loss of $50,000) * ..............................

(190,000)

Income tax benefit............................................................. 76,000


Net income .......................................................................... $ 286,000

* Loss on discontinued operations:

Operating loss $(140,000)

Impairment loss ($250,000 - 200,000) (50,000)

Net before-tax loss (190,000)

Income tax benefit (40%) 76,000

Net after-tax loss on discontinued operations $(114,000)

Requirement 2

KANDON ENTERPRISES, INC.





Loss from operations of discontinued component * ........ (140,000)

Income tax benefit ............................................................ 56,000


Net income .......................................................................... $ 316,000

*Includes only the operating loss during the year. There is no impairment loss.


4-9

Exercise 4-8

Pretax income from continuing operations $14,000,000

Income tax expense (5,600,000)

Income from continuing operations 8,400,000

Less: Net income 7,200,000

Loss from discontinued operations $1,200,000

$1,200,000 60%* = $2,000,000 = before tax loss from discontinued

operations.

*1-tax rate of 40% = 60%

Pretax income of division $4,000,000

Add: Loss from discontinued operations 2,000,000

Impairment loss $6,000,000

Fair value of division’s assets $11,000,000

Add: Impairment loss 6,000,000

Book value of division’s assets $17,000,000


4-10

Exercise 4-9

Requirement 1

In general, we report voluntary changes in accounting principles retrospectively.

However, a change in depreciation method is considered a change in accounting

estimate resulting from a change in accounting principle. In other words, a change in

the depreciation method reflects a change in the (a) estimated future benefits from the

asset, (b) the pattern of receiving those benefits, or (c) the company’s knowledge

about those benefits, and therefore the two events should be reported the same way.

Accordingly, Canliss reports the change prospectively; previous financial statements

are not revised. Instead, the company simply employs the straight-line method from

now on. The undepreciated cost remaining at the time of the change would be

depreciated using the straight-line method over the remaining useful life. A

disclosure note should justify that the change is preferable and should describe the

effect of the change on any financial statement line items and per share amounts

affected for all periods reported.

Requirement 2

Asset’s cost $800,000

Accumulated depreciation to date ($320,000 + 192,000) (512,000)

To be depreciated over remaining 3 years $288,000

2011 straight-line depreciation: $288,000 ÷ 3 years = $96,000

Adjusting entry:

Depreciation expense (calculated above)...................... 96,000

Accumulated depreciation ....................................... 96,000


4-11

Exercise 4-10

Requirement 1

This is a change in accounting estimate.

Requirement 2

When an estimate is revised as new information comes to light, accounting for

the change in estimate is quite straightforward. We do not restate prior years'

financial statements to reflect the new estimate. Instead, we merely incorporate the

new estimate in any related accounting determinations from there on. If the after-tax

income effect of the change in estimate is material, the effect on net income and

earnings per share must be disclosed in a note, along with the justification for the

change.

Requirement 3

$800,000 Cost

$160,000 Previous annual depreciation ($800,000 ÷ 5 years)

x 2 years 320,000 Depreciation to date (2009-2010)

480,000 Book value

÷ 6 yrs. Estimated remaining life (8 years - 2 years)

$ 80,000 New annual depreciation


4-12

Exercise 4-11

Requirement 1

This is a change in accounting estimate.

Requirement 2

$2,400,000 Cost

$240,000 Previous annual amortization ($2,400,000 ÷ 10 years)

x 21/2 yrs. 600,000 Amortization to date (2009-2011)

1,800,000 Book value

÷ 5 yrs. Estimated remaining life (given)

$ 360,000 New annual amortization

Exercise 4-12 Earnings per share:

Income from continuing operations $5.00

Loss from discontinued operations (1.60)

Extraordinary gain 2.20

Net income $5.60


4-13

Exercise 4-13

Requirement 1

THE MASSOUD CONSULTING GROUP

Statement of Income and Comprehensive Income (in part)


Net income .......................................................... $1,354,000

Other comprehensive income (loss):

Foreign currency translation gain, net of tax .. $168,000

Unrealized losses on investment securities,

net of tax ....................................................... (56,000)

Total other comprehensive income .................... 112,000

Comprehensive income ...................................... $1,466,000

Requirement 2

THE MASSOUD CONSULTING GROUP

Statement of Comprehensive Income


Net income .......................................................... $1,354,000

Other comprehensive income (loss):

Foreign currency translation gain, net of tax .. $168,000

Unrealized losses on investment securities

net of tax ....................................................... (56,000)

Total other comprehensive income .................... 112,000

Comprehensive income ...................................... $1,466,000


4-14

Exercise 4-14

Requirement 1

U.S. GAAP also permits the presentation of other comprehensive income items

in the statement of shareholders’ equity.

Requirement 2

IAS No. 1 also allows companies to report other comprehensive income items in

either a combined statement of income and comprehensive income or in a separate

statement of comprehensive income. Presentation in the statement of shareholders’

equity is not permitted.

Exercise 4-15 1. b Purchase of equipment for cash.

2. a Payment of employee salaries.

3. a Collection of cash from customers.

4. c Cash proceeds from a note payable.

5. b Purchase of common stock of another corporation for cash.

6. c Issuance of common stock for cash.

7. b Sale of machinery for cash.

8. a Payment of interest on note payable.

9. d Issuance of bonds payable in exchange for land and building.

10. c Payment of cash dividends to shareholders.

11. c Payment of principal on note payable.


4-15

Exercise 4-16 Bluebonnet Bakers

Statement of Cash Flows


Cash flows from operating activities:

Collections from customers $ 380,000

Interest on note receivable 6,000

Purchase of inventory (160,000)

Interest on note payable (5,000)

Payment of salaries (90,000)

Net cash flows from operating activities $131,000

Cash flows from investing activities:

Collection of note receivable 50,000

Sale of investments 30,000

Purchase of equipment (85,000)

Net cash flows from investing activities (5,000)

Cash flows from financing activities:

Proceeds from note payable 100,000

Payment of note payable (25,000)

Payment of dividends (20,000)

Net cash flows from financing activities 55,000

Net increase in cash 181,000

Cash and cash equivalents, January 1 17,000

Cash and cash equivalents, December 31 $ 198,000


4-16

Exercise 4-17 Cash collected for interest, considered an operating cash flow by U.S. GAAP,

could be classified as either an operating cash flow or an investing cash flow

according to International Accounting Standards.

Cash paid for interest, considered an operating cash flow by U.S. GAAP, could

be classified as either an operating cash flow or a financing cash flow according to

International Accounting Standards.

Cash paid for dividends, considered a financing cash flow by U.S. GAAP, could

be classified as either an operating cash flow or a financing cash flow according to

International Accounting Standards.

Accordingly, the statement of cash flows prepared according to IFRS could be

the same as under U.S. GAAP (E4-16) or could be presented as follows:

Bluebonnet Bakers

Statement of Cash Flows


Cash flows from operating activities:

Collections from customers $ 380,000

Purchase of inventory (160,000)

Payment of salaries (90,000)

Payment of dividends (20,000)


Cash flows from investing activities:

Collection of note receivable 50,000

Interest on note receivable 6,000

Sale of investments 30,000

Purchase of equipment (85,000)

Net cash flows from investing activities 1,000

Cash flows from financing activities:

Proceeds from note payable 100,000

Payment of note payable (25,000)

Interest on note payable (5,000)

Net cash flows from financing activities 70,000

Net increase in cash 181,000

Cash and cash equivalents, January 1 17,000

Cash and cash equivalents, December 31 $ 198,000


4-17

Exercise 4-18 Cash flows from operating activities:

Net income $17,300

Adjustments for noncash effects:

Depreciation expense 7,800

Changes in operating assets and liabilities:

Increase in accounts receivable (4,000)

Decrease in inventory 5,500

Decrease in prepaid insurance 1,200

Decrease in salaries payable (2,700)

Increase in interest payable 800


CHapter 4A solution

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Transcript of CHapter 4A solution