CHAPTER 4INCOME STATEMENT AND RELATED INFORMATION TRUE-FALSE—Conceptual Answer T F F T T T F F T F T F F T F F T F F T No. Description 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Usefulness of the income statement. Limitations of the income statement. Earnings management. Transaction approach of income measurement. Single-step income statement. Revenues and gains. Multiple-step vs. single-step income statement. Multiple-step income statement. Multiple-step vs. single-step income statement. Current operating performance approach. Reporting discontinued operations. Reporting extraordinary items. Irregular items. Intraperiod tax allocation. Reporting earnings per share. Computation of earnings per share. Prior period adjustments. Retained earnings restrictions. Comprehensive income definition. Reporting other comprehensive income. MULTIPLE CHOICE—Conceptual Answer c d b d d b d a b c b b a d d a No. Description 21. 22. 23. S 24. S 25. 26. 27. 28. 29. S 30. P 31. P 32. 33. 34. 35. 36. Elements of the income statement. Usefulness of the income statement. Limitations of the income statement. Use of an income statement. Income statement reporting. Single-step income statement. Methods of preparing income statements. Income statement presentation. Event with no income statement effect. Net income effect. Selling expenses. Reporting merchandise inventory. Definition of an extraordinary item. Classification of an extraordinary item. Identification of an extraordinary item. Identification of an extraordinary item. Test Bank for Intermediate Accounting, Twelfth Edition 4-2 MULTIPLE CHOICE—Conceptual (cont.) Answer d a d d c c d d c c d c d d c c No. Description 37. 38. 39. 40. 41. 42. 43. 44. S 45. S 46. P 47. 48. 49. 50. 51. 52. Identification of an extraordinary item. Presentation of unusual or infrequent items. Identification of a change in accounting principle. Classification of extraordinary items. EPS disclosures on income statement. Reporting discontinued operations. Intraperiod tax allocation. Purpose of intraperiod tax allocation. Reporting unusual or infrequent items. Earnings per share disclosure. Reporting correction of an error. Retained earnings statement. Prior period adjustment. Identification of a prior period adjustment. Comprehensive income items. Providing information about components of comprehensive income. MULTIPLE CHOICE—Computational Answer a c c c a a a a c b a b c c c c c a b c d d d a P S No. Description 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. Single-step income statement. Multiple-step income statement. Multiple-step income statement. Calculation of net sales. Presentation of gain on sale of plant assets. Extraordinary items. Extraordinary items. Calculate income before extraordinary items. Calculate income before taxes and extraordinary items. Calculate extraordinary loss. Events affecting income from continuing operations. Calculation of events affecting net income. Disposal of a major business component. Tax effect on irregular items. Tax effect on irregular items. Earnings per share. Earnings per share. Retained earnings statement. Retained earnings statement. Retained earnings statement. Retained earnings statement. Calculate balance of retained earnings. Calculate other comprehensive income. Calculate comprehensive income. Note: these questions also appear in the Problem-Solving Survival Guide. Note: these questions also appear in the Study Guide. Income Statement and Related Information MULTIPLE CHOICE—CPA Adapted Answer d a a a d c a b a b No. Description 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. Calculate selling expenses. Calculate general and administrative expenses. Calculate selling expenses. Calculate general and administrative expenses. Calculate cost of goods manufactured. Calculate income before extraordinary item. Determine extraordinary loss. Determine infrequent gains not extraordinary. Determine infrequent losses not extraordinary. Identification of prior period adjustment. EXERCISES Item Description E4-87 E4-88 E4-89 E4-90 E4-91 E4-92 E4-93 E4-94 E4-95 Definitions. Terminology. Income statement disclosures. Calculate net income from change in stockholders’ equity. Calculate net income from change in stockholders’ equity. Income statement classifications. Income statement relationships. Multiple-step income statement. Classification of income and retained earnings statement items. PROBLEMS Item Description P4-96 P4-97 P4-98 P4-99 P4-100 Multiple-step income statement. Income statement form. Multiple-step income statement. Single-step income statement. Income statement and retained earnings statement. CHAPTER LEARNING OBJECTIVES 1. Understand the uses and limitations of an income statement. 2. Prepare a single-step income statement. 3. Prepare a multiple-step income statement. 4. Explain how to report irregular items. 5. Explain intraperiod tax allocation. 6. Identify where to report tax earnings per share information. 7. Prepare a retained earnings statement. 8. Explain how to report other comprehensive income. 4-3 46. 36. 12. MC MC MC MC P 10. Note: S 32. 69. 59. 29. TF 6. Learning Objective 5 MC 96.4-4 Test Bank for Intermediate Accounting. S MC 24. 91. MC 74. MC MC MC MC MC MC 41. MC 62. 11. 54. 71. 60. 43. TF TF 21. TF TF TF TF MC MC 35. 100. Learning Objective 8 MC 52. P E E E 99. Learning Objective 7 MC 73. 17. 58. E E MC MC MC E 93. 49. MC P . E P P P P P P P 100. MC MC MC 70. MC 77. MC 83. E 98. MC 84. 100. 16. MC 87. 100. 56. P P MC MC MC MC E E 95. TF TF MC 48. TF = True-False MC = Multiple Choice Type Item Type Item Learning Objective 1 S MC 23. 15. S 45. 4. MC 88. 13. MC 88. P 99. P 99. 88. Learning Objective 2 MC 53. MC 80. 94. MC 87. MC MC 68. MC 86. TF 51. TF 20. MC MC 67. 98. 96. 95. 39. 33. MC 92. MC 25. 5. 89. MC 95. 42. TF TF TF MC 28. P 31. 96. 14. S 30. 66. MC 75. 34. 22. E 97. 7. Learning Objective 6 MC 87. MC 79. Learning Objective 3 MC 57. TF 26. P 98. 8. 37. 27. MC 65. 19. 38. TF TF 3. MC 78. MC 82. MC 81. MC 64. MC 87. 72. 18. MC 82. P 47. TF MC 44. 40. E = Exercise P = Problem Type MC E Item Type Item Type 88. MC 85. E E E P 98. 9. TF TF 41. E E 90. MC 80. MC 63. MC 96. 97. 99. 50. 55. Twelfth Edition SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item 1. 2. P P MC 76. MC 99. Learning Objective 4 MC 61. P P P 100. Use of a multiple-step income statement will result in the company reporting a higher net income than if they used a single-step income statement. A company that reports a discontinued operation or an extraordinary item has the option of reporting per share amounts for these items. Companies frequently report income tax expense as the last item before net income on a single-step income statement. 7. extraordinary items. 12. 3. 15. Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations. 11. 4.Income Statement and Related Information 4-5 TRUE-FALSE—Conceptual 1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows. 6. 5. 2. 14. The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another. . Earnings management generally makes income statement information more useful for predicting future earnings and cash flows. 10. 16. A strength of the income statement as compared to the balance sheet is that items that cannot be measured reliably can be reported in the income statement. Gross profit and income from operations are reported on a multiple-step but not a singlestep income statement. Discontinued operations. Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision. Gains or losses from exchange or translation of foreign currencies are reported as extraordinary items. 8. 9. The accounting profession has adopted a current operating performance approach to income reporting. and unusual gains and losses are all reported net of tax in the income statement. Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share. Both revenues and gains increase both net income and owners’ equity. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period. 13. 3. income measurement involves judgment. help assess the risk or uncertainty of achieving future cash flows. Use by investors interested in the financial position of the entity. b. revenue. Which of the following would represent the least likely use of an income statement prepared for a business enterprise? a. discontinued operations. 7. Companies only restrict retained earnings to comply with contractual requirements or current necessity. 12. . c. 5. c. income numbers are affected by the accounting methods employed. 4. d. revenues. 24. d. evaluate the past performance of the enterprise. 20. Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners. F T F F T MULTIPLE CHOICE—Conceptual S 21. Use by labor unions to examine earnings closely as a basis for salary discussions. 10. 2. only actual amounts are reported in determining net income. d. gains. expenses. Ans. Information in the income statement helps users to a. items that cannot be measured reliably are not reported. 8. 13. provide a basis for predicting future performance. all of these. 15. d.Test Bank for Intermediate Accounting. T F F T F Item 16. and losses. operating section. b. Limitations of the income statement include all of the following except a. True False Answers—Conceptual Item 1. b. Use by government agencies to formulate tax and economic policy. 18. 19. Ans. all of these. The components of other comprehensive income can be reported in a statement of stockholders’ equity. nonoperating section. 22. b. Twelfth Edition 4-6 17. 20. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement. selling expenses. Ans. The major elements of the income statement are a. extraordinary items. 23. cost of goods sold. and cumulative effect. Ans. T F F T T Item 6. 17. 19. c. and general expense. Use by customers to determine a company's ability to provide needed goods and services. T F F T F Item 11. c. 9. 18. 14. c. c. A consolidated statement of income d. 30. 27. collection in 2007 of a receivable from a customer whose account was written off in 2006 by a charge to the allowance account. The occurrence that most likely would have no effect on 2007 net income is the a. P 31. b. d. A multiple-step income statement c. sale in 2007 of an office building contributed by a stockholder in 1961. resources and equities of a firm at a point in time. Office salaries expense c. the various components of income from continuing operations. the gross profit figure. Store supplies consumed . A single-step income statement b.Income Statement and Related Information S S 4-7 25. Advertising expense b. The single-step income statement c. d. b. collection in 2007 of a dividend from an investment. Including gains and losses from discontinued operations of a component of a business in determining net income 29. 26. net earnings (net income) of a firm for a period of time. c. stock purchased in 1993 deemed worthless in 2007. Which of the following is not a selling expense? a. d. b. The income statement reveals a. Including prior period adjustments in determining net income b. Which of the following is an acceptable method of presenting the income statement? a. Which of the following is not a generally practiced method of presenting the income statement? a. resources and equities of a firm for a period of time. sale in 2007 of an office building contributed by a stockholder in 1983. worthlessness determined in 2007 of stock purchased on a speculative basis in 2003. settlement based on litigation in 2007 of previously unrecognized damages from a serious accident which occurred in 2005. extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement. c. The occurrence which most likely would have no effect on 2007 net income (assuming that all amounts involved are material) is the a. net earnings (net income) of a firm at a point in time. total revenues and total expenses. d. b. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. The consolidated statement of income d. Freight-out d. All of these 28. The single-step income statement emphasizes a. b. infrequent and material in amount. d. Shown net of income tax after extraordinary items but before net earnings. d. gains from a company selling the only investment it has ever owned. 37. b. 36. Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate. Write-off of deferred marketing costs believed to have no future benefit. The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31. d. c. d. Flood damage should never be classified as an extraordinary item. only in the cost of goods sold section of the income statement. gains from transactions involving foreign currencies. but it need not be material. b. Only if the flood damage is material in amount and could have been reduced by prudent management. b. 2007. . and material in amount. The January 1. d. b. c. none of these. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes? a. c. 34. Which of these is generally an example of an extraordinary item? a. infrequent. loss from a strike. unusual in nature and infrequent.S. 2007 merchandise inventory balance will appear a.4-8 P Test Bank for Intermediate Accounting. d. c. c. b. Classification as an extraordinary item on the income statement would be appropriate for the a. substantial write-off of obsolete inventories. unusual in nature and material. but it need not be infrequent. Only if floods in the geographical area are unusual in nature and occur infrequently. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet. losses from moving a plant to another city. write-off of goodwill. unusual in nature. 38. b. Twelfth Edition 32. 33. only as an asset on the balance sheet. 35. gain or loss on disposal of a component of the business. but it need not be unusual in nature. An item that should be classified as an extraordinary item is a. Shown in operating revenues or expenses if material but not shown as a separate item. dollar. How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? a. Gain resulting from the devaluation of the U. c. Shown net of income tax after ordinary net earnings but before extraordinary items. c. Loss incurred because of a strike by employees. In order to be classified as an extraordinary item in the income statement. d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot. an event or transaction should be a. Under any circumstances as an extraordinary item. c. Gain on a sale of the only security investment a company has ever owned. Which of the following is never classified as an extraordinary item? a. 42. an amount after continuing operations and before extraordinary items. b. the transaction should be included in the income statement as a gain or loss on disposal reported as a. A change in the estimated service life of machinery b. d. a bulk sale of plant assets included in income from continuing operations. Losses from exchange or translation of foreign currencies. d. b. d. but should be reported together with the results of continuing operations. discontinued operations. Results of operations of a discontinued component should be disclosed immediately below extraordinary items. The gain or loss on disposal should be reported as an extraordinary item.Income Statement and Related Information 4-9 39. Income taxes are allocated to a. When a company discontinues an operation and disposes of the discontinued operation (component). It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments. prior period adjustments. d. b. A change from straight-line to double-declining-balance d. A change from FIFO to LIFO and a change from straight-line to double-decliningbalance 40. a prior period adjustment. . Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? a. c. all of these. c. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. 41. Which of the following is a change in accounting principle? a. b. an extraordinary item. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement. c. b. Its purpose is to allocate income tax expense evenly over a number of accounting periods. 44. Its purpose is to relate the income tax expense to the items which affect the amount of tax. c. d. 43. The gain or loss on disposal should not be segregated. Which of the following is true about intraperiod tax allocation? a. extraordinary items. Losses from a major casualty. Losses from an expropriation of assets. A change from FIFO to LIFO c. but separately listed on the income statement and fully explained in a note to the financial statements. c. P 47. b. In the income statement Yes No Yes No Net of tax Yes No No Yes 48. 50. net income and gross margin. Which of the following items will not appear in the retained earnings statement? a. Which one of the following types of losses is excluded from the determination of net income in income statements? a. an extraordinary item for the year in which the error was made. Net loss b. Material losses resulting from correction of errors related to prior periods. unrealized holding gains. Discontinued operations d. d.4 . Test Bank for Intermediate Accounting. net income and pretax income. Comprehensive income includes all of the following except a. d.10 S 45. losses on disposal of assets. Twelfth Edition A material item which is unusual in nature or infrequent in occurrence. d. Correction of the error when discovered in the next year should be treated as a. income before extraordinary items. extraordinary items and prior period adjustments. Material losses resulting from unusual sales of assets not acquired for resale. an increase in depreciation expense for the year in which the error is discovered. a component of income for the year in which the error is discovered. c. dividend revenue. d. Dividends 49. 51. c. b. c. Prior period adjustment c. Material losses resulting from transactions in the company's investments account. c. but not both should be shown in the income statement a. d. b. d. Shank Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. A correction of an error in prior periods' income will be reported a. The error caused the net income to be reported at almost double the proper amount. Net of Tax No Yes No Yes Disclosed Separately No Yes Yes No S 46. . investments by owners. a prior period adjustment. Earnings per share should always be shown separately for a. b. Material losses resulting from the write-off of intangibles. b. c. b. 22. c.500 6. separate column in the statement of changes in stockholders’ equity. gross profit a. Ans. should be reported at $40.500. c c d d c Item 46. Ans.500. 42. 54. 47.000 23. 49.000 In Garret Wolfe’s multiple-step income statement. c. the following information is available: Cost of goods sold Dividend revenue Income tax expense Operating expenses Sales $ 60. should not be reported. should be reported at $13. 4 . Solution to Multiple Choice question for which the answer is “none of these. combined income statement of comprehensive income. should be reported at $42. 29. Many answers are possible. Ans. MULTIPLE CHOICE—Computational 53. d. c c . gross profit a. Multiple Choice Answers—Conceptual Item 21. 39. d. second separate income statement. 23. c d c d d 51.000. 28. 44. 35.000 23. 50. should be reported at $40. 48. 38. 40.000 In Garret Wolfe’s single-step income statement. the following information is available: Cost of goods sold Dividend revenue Income tax expense Operating expenses Sales $ 60.500. 27.000 100. b d a b c Item 31.” 34. should not be reported b. 45. Item Ans. footnote disclosure. 34.500. should be reported at $13.000. 43. 32.500 6. c.000 100.000 2. 30. b. b b a d d Item 36. 52. d. 37. b. Ans.11 The approach most companies use to provide information related to the components of other comprehensive income is a a. For Garret Wolfe Company. 24. Ans. For Garret Wolfe Company. c d d d d Item 26.000 2. 33. 25.Income Statement and Related Information 52. should be reported at $42. a d a d d Item 41. Ans. Ignoring income taxes. b. c. and the gain is not considered unusual or infrequent. gross profit a. sales returns and allowances were $370.000. what total amount should Sam Hurd Company report as extraordinary losses? a. Twelfth Edition 55. d.000.000.000.000 9. c.035. a prior period adjustment net of applicable taxes.000.720. $15. what total amount should Fleming Company report as extraordinary losses? a. $233.350. Sam Hurd Company has the following items: write-down of inventories.000.000. Net sales last year for Otto Company were a.000 and an increase in income tax expense of $250. d. $570.720.000. $185.000. $240. should not be reported b. $370.000 less related taxes of $250.12 Test Bank for Intermediate Accounting.000.000.000.000. d. the income statement for the period would disclose these effects as a.000.000.000 35. operating income net of applicable taxes. a gain of $820. 57. loss on disposal of Sports Division. 56.000 b.000. $15.000. 58.000 4. c.000. $226. the following information is available: Cost of goods sold Dividend revenue Income tax expense Operating expenses Sales $ 90. should be reported at $20. sales discounts were $175. Fleming Company has the following items: write-down of inventories.000 150. and loss due to strike. 59. an extraordinary item net of applicable taxes. d. b. $226. should be reported at $64. c. $15. $120. and loss due to an expropriation.000.000. . $370. $570. $ -0-. Gross billings for merchandise sold by Otto Company to its customers last year amounted to $15. $596. d.000. For Merando Company. $298.000.000. should be reported at $60. $15.000.4 . loss on disposal of Sports Division.175. b. $570.000.000 In Merando’s multiple-step income statement. If plant assets of a manufacturing company are sold at a gain of $820. $185. $113. $466. Ignoring income taxes.000.000. and freight-out was $140.000. c. 000. $615.000. (4) A flood destroyed a building that had a book value of $500. $240. A review of the December 31.000 before deducting the related tax effect. (1) Depreciation for 2005 was found to be understated by $30. (2) In an unusual and infrequent occurrence. (3) During 2007. (2) A strike by the employees of a supplier resulted in a loss of $25. b. Ignoring income taxes.000 were written off as uncollectible.000. The company's income before income taxes and extraordinary items was a.13 60.000. $330. c. . b. 62. $675. At Hall Company. The income taxes payable for the year are $1.000. $416. 2007. d.500. financial statements of Baden Corporation revealed that under the caption "extraordinary losses.000. (4) Uncollectible accounts receivable of $30. $1. Thus.500.000 that is applicable to an extraordinary gain. with an applicable income tax rate of 30%. (3) The inventory at December 31. Floods are very uncommon in that area. $250.000 incurred in the abandonment of equipment formerly used in the business. An income statement shows “income before income taxes and extraordinary items” in the amount of $2.335. including $360. $400.000.000.000.000. c. 61. d.000. The effect of these events and transactions on 2007 income from continuing operations net of tax would be a.000.000. Included in income for the period was an extraordinary loss from flood damage of $30. $231. b. d. $150. the “income before extraordinary items” is a. a loss of $250.000 was sustained as a result of hurricane damage to a warehouse.000. c.080.000.Income Statement and Related Information 4 . $66. reported net income of $210." Baden reported a total of $515. what amount of loss should Baden report as extraordinary on its 2007 income statement? a. $515.000. The tax rate for all items is 30%.500. Cole Company. $1.000. events and transactions during 2007 included the following.000. $38.395.000. 63. 2005 was overstated by $40.000 in losses was comprised of the following items: (1) Baden recorded a loss of $150. d. c. Use the following information for questions 63 and 64. $300. Further analysis revealed that the $515.000.055.000.500. $17. several factories were shut down during a major strike by employees. b. resulting in a loss of $85. 200. on the sale of Pine's assets. 66. Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations $1.000 60. d. net of taxes.000 loss 0 0 200. At what amount should Dan Nicholson report each item? a.000) (200.00.000 loss $1. d. Gomez realized a gain of $1. d. Dan Nicholson Corporation has an extraordinary loss of $50.000 .000 gain 200.000 84.000 84.400. c.40. c.14 Test Bank for Intermediate Accounting. $500. $17. 67.000 loss 1.000 loss Extraordinary loss $(200. were $1.000 21.400. and a tax rate of 40%.000) (120. an unusual gain of $140. and a tax rate of 40%. $416. an unusual gain of $35.000.000.000) Unusual gain $35. Extraordinary loss $(50. How should these facts be reported in Gomez's income statement for 2007? a.60 c. b. d. a major component of its business.000) (120.00. During 2007.000) Unusual gain $140. b. d.000 140. b.000.000) (30.000 in 2007. $5.200. b.000) (30. 65.000.000 Carpino Corporation has an extraordinary loss of $200. Pine's operating losses. c. c.000 gain 1.500. $388. 68. $3. $367.400. net of taxes.500.000 140. At what amount should Carpino report each item? a.000. b.500.000 Craig Rusch Corporation reports the following information: Net income Dividends on common stock Dividends on preferred stock Weighted average common shares outstanding Rusch should report earnings per share of a.000) (50.000 100. $3. The effect of these events and transactions on 2007 net income net of tax would be a. $4.200. Gomez Corporation disposed of Pine Division.000 35.500. Twelfth Edition 64.000 21.4 . Edmonds Corporation reports the following information: Net income Dividends on common stock Dividends on preferred stock Weighted average common shares outstanding $500.000 Retained earnings. 1/1/07.110.110.570.000.000 Net income 500. $2. as reported 1. $3. $2. $2. as adjusted at a.000 200. d. 1/1/07.000.50. as adjusted at a. net of tax $ 215.000.000. c.000 Retained earnings. c. d. $1.000. b.000 140. 4 . Simmons Corporation reports the following information: Correction of understatement of depreciation expense in prior years. $1.000 Dividends declared 160. c.555.570. b.20. $2.000 Edmonds should report earnings per share of a. 12/31/07. Simmons Corporation reports the following information: Correction of understatement of depreciation expense in prior years.000. $3.430.000 Simmons should report retained earnings. 71. 70. Joe Novak Corporation reports the following information: Correction of overstatement of depreciation expense in prior years. $2. 72.000 Simmons should report retained earnings.000. as reported 2. $785. net of tax $ 430. 1/1/07.250. net of tax $ 430. b. $1.000 60.000 Dividends declared 320. as reported 2.000. d.000. $2.000.Income Statement and Related Information 69.000 Joe Novak should report retained earnings. b.000.000.000 Net income 1.000. d.000. 1/1/07.000.15 . 1/1/07.000 Retained earnings.680.000.000. as adjusted at a.000 Net income 1.000.000.215.000 Dividends declared 320. $1.50.80 c. $1. $1. $1. c. c.000. $20. Test Bank for Intermediate Accounting.000. 74. $700. $655.000 Net income 500.000.000. c. net of tax $ 215. The following information was extracted from the accounts of Boone Corporation at December 31. b.000 . Penn Company reported the following information for 2007: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale securities Cash dividends received on the securities $510. 2007 75. b.125. d. 12/31/07.000.000 55.000 Retained earnings.000.000) Total stock dividends distributed (200.000. 2007: CR(DR) Total reported income since incorporation $1. as reported 1.000 55.000. d.16 73.000 20.000. $42.000. $785.4 . $137. Twelfth Edition Joe Novak Corporation reports the following information: Correction of overstatement of depreciation expense in prior years. $1.000 Dividends declared 160.000) Unrealized holding loss (120.000 2.000. at a.340.000) Prior period adjustment.000. $117. b. $40. d.000 350. $97. Silas Company reported the following information for 2007: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale securities Cash dividends received on the securities For 2007. $1. $500. 75. 76. $135.000.000 2. 1/1/07.555. c. d.000 Joe Novak should report retained earnings.700. 2007? a.000.000. $1.000.000 What should be the balance of retained earnings at December 31.000 350.000 Total cash dividends paid (800. recorded January 1. $775. b.000. Silas would report comprehensive income of a. $115. $580.000 40. Penn would report other comprehensive income of a.000 For 2007. $305. 66. Ans.000 One-half of the rented premises is occupied by the sales department.000.000 180. d. Ans. 58. 2007. Meyer Corp. Bowen Corp. $230.000. 77. b. 64. reports operating expenses in two categories: (1) selling and (2) general and administrative. Ans. 78. d d d a MULTIPLE CHOICE—CPA Adapted Use the following information for questions 77 and 78. 79.000. c b a b Item 65. a a a a Item 61. $470. 56. The adjusted trial balance at December 31.000. Ans. 63.000. a c c c Item 57. 67. 68.000 110. 54. 55. 76.000 120. $320. Item Ans.17 Multiple Choice Answers—Computational Item 53. c a b c 73.000. The adjusted trial balance at December 31. 70. 74. 62. c c c c Item 69. reports operating expenses in two categories: (1) selling and (2) general and administrative.Income Statement and Related Information 4 . $500. 72.000 60. Ans. c. 60. 59.000. 71.000 75. 2007 included the following expense and loss accounts: . d.000. included the following expense accounts: Accounting and legal fees Advertising Freight-out Interest Loss on sale of long-term investments Officers' salaries Rent for office space Sales salaries and commissions $140. $395. b. 75. How much of the expenses listed above should be included in Meyer's general and administrative expenses for 2007? a. c.000 30. $410. How much of the expenses listed above should be included in Meyer's selling expenses for 2007? a. $440.000 180. d. c.000.000 80.000 220.'s income statement for the year ended December 31.000 Totals $110. $430.000 Commissions to salespersons 8. 2007 included the following: Debit Credit Sales $140.000 30.000 170.000 Interest revenue 5.000.000. $220. 2007 $80.000 Rent for office space 180.000 Cost of sales $ 50.000.000. $430.000 225.000 One-half of the rented premises is occupied by the sales department. Twelfth Edition Accounting and legal fees Advertising Freight-out Interest Loss on sale of long-term investment Officers' salaries Rent for office space Sales salaries and commissions $140. 2007: Legal and audit fees $130. c.000 Loss on abandoned equipment used in operations 35.000 180.000 Interest on inventory floor plan 210.4 . $460.000 Loss due to earthquake damage 12. What amount of the above-listed items should be classified as general and administrative expenses in Nen's multiple-step income statement? a.000 Other information: Hogan's income tax rate is 30%. $540.000. 80.18 Test Bank for Intermediate Accounting.000 Loss on sale of equipment 9. Bowen's total selling expenses for 2007 are a.000 70. The following items were among those that were reported on Nen Co. $255.'s trial balance of income statement accounts for the year ended December 31. $310.000 Bad debt expense 3. Finished goods inventory: January 1. Use the following information for questions 81 through 83. b.000 The office space is used equally by Nen's sales and accounting departments. b.000 .000 70. d.000 $145.000 Freight-out 3. Hogan Corp.000.000 Administrative expenses 25.000. $370. 2007 December 31. 000. incurred the following infrequent losses during 2007: A $70. A $60.000.000 loss on the write-down of inventories.000. 81. d.000. b. c. $140. 85.000. Agler Corp. $47.000 gain from selling the only investment Agler has ever owned.000. $43. No c. $130. Inc. d. A $210.000 write-down of equipment leased to others.900. d. $40. $170. $21. $64. c.000.000.000.000.500. In its 2007 income statement. b.000.400. b. A $40. Yes b. $110. had the following infrequent transactions during 2007: A $150. $290. d. $32. what amount should Agler report as total infrequent net gains that are not considered extraordinary? a.000.700. $100. $8.Income Statement and Related Information 4 . b. Yes d.000. Snead.000 adjustment of accruals on long-term contracts.000 gain on the sale of equipment. $360. In its 2007 income statement.19 On Hogan's multiple-step income statement for 2007. 83.000 write-off of obsolete inventory. c. A $70. $80. $12. 84. c. Which of the following should be reported as a prior period adjustment? Change in Estimated Lives of Depreciable Assets a. No Change from Unaccepted Principle to Accepted Principle Yes Yes No No . c.000. $14. 86.000.000. $24. $60. what amount should Snead report as total infrequent losses that are not considered extraordinary? a. b. $63. 82. Extraordinary loss is a. Income before extraordinary item is a. d. Cost of goods manufactured is a. a 59.000 – $360.200.000 = $2. DERIVATIONS — Computational No.000 + ($30. Ans. $2.000) ÷ 200.215. c $100.000) ÷ 100.000 = $1.000 × . b $210.000. $515.000. a a Item 81.570. 72.40.7 = $330.000 – $150.000 × .000.60 = $120.000 – $430. b $2.000.60 = $30.000.000.000 × .000.20.000 ÷ .000. 84.000 = $1. 71. 67.000.000 – $370. a 60.000 – $30. Twelfth Edition Multiple Choice Answers—CPA Adapted Item 77.000 – $60.000 = $40. 63.000.000 = $250. c ($500.000 × .500 + ($500.000 – $7.000 $231. 78. a $2.000 + $215.000 = $15.000 = $200.000 + $1.500.000 = $4.175. 86. c ($500. c $1. 66.500. a b 83.000 = $2. c $50. d a Item 79.7) = $231. Item Ans.000 = $60. Answer Derivation 53.250. c $15.000.20 Test Bank for Intermediate Accounting. c $150. a 54. 64. Ans.7) = $367.000. c $1. Ans.000 – $60.000 – $90.000 – $1.720.000. a b 85. 65.000 – $85. b $17. 61. a. c 62.000.000 – $60. 69. 80.000. 56.000 – $175.4 . . a 58.080. 55. 57. 68. d c Item Ans.055.335. 70.000) = $1. a $25. 82.000 – $320.400.000 – $430.500 = $17.000.000 – ($1. c $200. 000 – $200.000 = $220. 86.000 + $40.000.000 – $55.000 + $110.000. 82.000.000 + $70.000. Answer Derivation 77. 74. DERIVATIONS — CPA Adapted No.700.000 = $410.000 – $3.000 + $90.000.000 + $2. 79.000 – $8.000 + $5. a $140. 81.000.000 – $80.000 + $80. a $70.555.000 – $3.000 – $25. 84.000 × 0.000 + $500. 80. 78.000 = $540.000 = $140.000 – $50.000.000 + $75.000 – $70.000. 83. a $12.000 – $14. Answer 4 .000 + $90.21 Derivation 73.900.000 = $40. d $50.400.000 + $20.000 + $215. c $140.000.000 = $395.100 = $32.000 = $117. a $130. a $500.Income Statement and Related Information No. . b $210.000.000 + $90. 75.000 + $110. d $120.000 – $9.000 + $60.000 + $75.000 = $1.000 + $180.000 + $170.000 – $800.000 = $775. b Conceptual.000. d $1.000 – $350.000 – $160.000.7 = $8. 76. d Other comprehensive income = $40. a $180. d $1.000 = $170. 85. events. considering the environment. 5. What are gains? 4. 3. Provide clear. considering the environment. 8. 7. What are revenues? 2. 2. events. 1. 4. What are losses? 5. and (b) there is no significant continuing involvement in that component after the disposal transaction. 6. Both of the following criteria should be met to classify an item as extraordinary: (1) Unusual nature. What are the criteria (in addition to materiality) that must be met to classify an event or transaction as extraordinary? 6. Indicate how earnings per share is computed.4 . Prior period adjustments include correction of an error in the financial statements of a prior period. concise answers for the following. or circumstances affecting the entity except those resulting from expenses or distributions to owners. Solution 4-87 1. . The computation of earnings per share is: Net income minus preferred dividends divided by the weighted average of common shares outstanding. Prior period adjustments (net of tax) should be charged or credited to the opening balance of retained earnings. Gains are increases in net assets from peripheral transactions. Twelfth Edition EXERCISES Ex. or circumstances affecting the entity except those resulting from revenues or investments by owners. A discontinued operation occurs when (a) the results of operations and cash flows of a component of a company have been eliminated from the ongoing operations. What are expenses? 3.22 Test Bank for Intermediate Accounting. State the primary category of prior period adjustments and indicate how they are reported in the financial statements. Losses are decreases in net assets from peripheral transactions. Revenues are increases in net assets during a period from delivering goods or services that constitute the entity's major or central operations. 4-87—Definitions. and (2) infrequent in occurrence. 8. When does a discontinued operation occur? 7. Expenses are the using-up of assets or other decreases in net assets during a period from delivering goods or services that constitute the entity's major or central operations. Extraordinary item. The income statement may also include discontinued operations (net of tax) and extraordinary items (net of tax). 4-89—Income statement disclosures. Intraperiod tax allocation. 1. 2. and losses. 4. ________________________________ 2. Comprehensive income. The income statement category for a disposal of a component of a business.Income Statement and Related Information 4 . Earnings per share. ________________________________ 3. 6. 5. All changes in equity during a period except those resulting from investments by owners and distributions to owners. 4-88—Terminology.23 Ex. Prior period adjustment. 3. ________________________________ Solution 4-88 1. In the space provided. 1. ________________________________ 5. Relating tax expense to specific items on the income statement. An event or transaction which is unusual in nature and infrequent in occurrence. 4. A correction of an error is reported as a 3. What is disclosed in an income statement? Be specific. Net income minus preferred dividends divided by the weighted average of shares outstanding. Ex. It discloses the net income (loss) for a period and earnings per share data. ________________________________ 6. gains. Discontinued operations. expenses. 2. write the word or phrase that is defined or indicated. 5. ________________________________ 4. Solution 4-89 An income statement discloses revenues. 6. . 000 Common stock 72.000 10. Presented below are changes in the account balances of Ping Company during the year.000 150.000 21.000 + $31.000 Accounts payable $34.000 13.4 .000 Paid-in capital 16. Solution 4-90 Assets Liabilities Stockholders' equity Computation of net income: Stockholders' equity December 31 Stockholders' equity January 1 Increase Add: Dividend declared Less: Common stock sold Net income January 1 $240.000 Plant Assets (net) 37. January 1 Assets.000) $ 24.000.000 13.000 Compute the net income for the year. December 31 Retained earnings. December 31 Common stock sold during the year Dividends declared during the year $240.000 Accounts receivable (net) (13. 4-90—Calculation of net income from the change in stockholders' equity.000 80. 4-91—Calculation of net income from the change in stockholders' equity.000 *$80. Compute the net income for the current year.000 150.24 Test Bank for Intermediate Accounting. . Twelfth Edition Ex.000) Bonds payable (20.000 230.000 (10. January 1 Common stock. Assets. Increase Increase (Decrease) (Decrease) Cash $29.000 Ex.000 31.000) Inventory 52.000 $ 90. except for retained earnings. December 31 Liabilities.000* $111.000 December 31 $111.000 The only entries in Retained Earnings were for net income and a dividend declaration of $12.000 90. Presented below is certain information pertaining to Juan Company. Subtracted from gross revenues. e. f. Sales discounts j. Cost of goods sold as an addition to purchases. d. . Dividend revenue d. Extraordinary items. subtracted from income before income taxes in arriving at net income. l. Other revenue.000 (88. Income taxes. Sinking fund income Solution 4-92 a. Purchase discounts i. net of tax f. i. Administrative or general expenses.000 14. 4-92—Income statement classifications.25 Solution 4-91 Computation of net income Change in assets ($118. Officers' salaries k. Selling expense.000 – $20. Other revenue. net of tax h. Major casualty loss. Freight-in e. Cost of goods sold. c. Income taxes on income g. Freight-out l.000 Increase Increase Increase Ex. g.000 – $13. Discontinued operations. b.Income Statement and Related Information 4 .000) Change in liabilities ($34.000 91. Advertising b. Cost of goods sold as a subtraction from purchases. Indicate the major section or subsection of a multiple-step income statement in which each of the following items would usually appear: a.000) Change in stockholders' equity Add: Dividend declared Less: Investment by stockholders Net income $105. k. Depletion c. Loss on disposal of a component of the business.000 12. j.000) $ 15. h. Selling expense. 8.000 (f) _______ Company C $540. 6.26 Test Bank for Intermediate Accounting. Company A Company B Sales (a) $_______ $343.000 (h) _______ 48. Solution 4-94 10.000 407. ( ) Net income.000 90. 1. ( ) Income taxes.300 255.300 (d) $97. Use the numerals 1 through 13 to indicate the order in which these categories should appear on a multiple-step income statement.000 (g) $380. 7. 9 .000 Operating expenses (c) _______ 50. 5. 11. 3.800 (e) $245.600 (d) _______ Net purchases 175. 4-94—Multiple-step income statement. Twelfth Edition Ex.400 (f) $48. ( ) Extraordinary item.600 Ending inventory 52. 2. ( ) Income from continuing operations. 4. 13.000 (g) _______ 63. 12.000 Ex. ( ) Income from continuing operations before income taxes. ( ) Discontinued operations.200 108.000 (h) $133. ( ) Income before extraordinary items. Listed below in scrambled order are 13 income statement categories. ( ) Income from operations. ( ) Cost of goods sold. ( ) Gross profit on sales.400 Beginning inventory 52. ( ) Operating expenses.000 (b) $175. ( ) Sales.000 (i) _______ Solution 4-93 (a) $261.000 (i) $85. Fill in the appropriate blanks for each of the independent situations below.4 .000 Cost of goods sold (b) _______ (e) _______ Gross profit 85.300 98. 4-93—Income statement relationships. ( ) Other revenues and gains.000 Income before taxes 6.700 (c) $79. indicate how it should be treated in the financial statements. ______ 4. ______ 10. Solution 4-95 1. Obsolete inventory was written off. Discontinued operations c. d 9. ______ 5. Use the following letter code for your selections: a. For each of the items listed below. ______ 2. Prior period adjustment ______ 1. d 5. Ordinary or unusual (but not extraordinary) item on the income statement b. Loss on sale of investments. Settlement of litigation with federal government related to income taxes of three years ago. Recognition of income earned last year which was inadvertently omitted from last year's income statement. ______ 9. The bad debt rate was increased from 1% to 2%. a 2. Loss on the disposal of a component of the business. c 4. An uninsured casualty loss was incurred by the company. a 11. This was the first loss of this type in the company's 50-year history. The company is continually involved in various adjustments with the federal government related to its taxes. a 3. a 10. ______ 6. ______ 8. a 7. The company sold one of its warehouses at a loss. 4-95—Classification of income statement and retained earnings statement items. A loss incurred from expropriation (the company owned resources in South America which were taken over by a dictator unsympathetic to American business). Discontinuance of all production in the United States. c 8. ______ 3. ______ 11. ______ 7. company's history. The company neglected to record its depreciation in the previous year.Income Statement and Related Information 4 . a 6. b This was the first loss of this type in the . Extraordinary item on the income statement d. thus increasing bad debt expense. The manufacturing operations were relocated in Mexico.27 Ex. The company last sold some of its investments two years ago. 000 Net income Per share of common stock— Income before extraordinary item Extraordinary item.000 120.000 240.000 33. 2006 Sales Selling and administrative expenses Hurricane loss (pre-tax) on plant (extraordinary item) Cash dividends declared on common stock Cost of goods sold Gain resulting from computation error on depreciation charge in 2005 (pre-tax) Other revenue Other expenses $ 650.000 620. Retained earnings. net of applicable income taxes of $87.000 520. Presented below is information related to Holt Company. Twelfth Edition PROBLEMS Pr.54) $ .000) $ 77.000 120.000 380. December 31. 2007 Sales Cost of goods sold Gross profit Selling and administrative expenses Income from operations Other revenue Other expenses Income before taxes Income taxes Income before extraordinary item Extraordinary loss.28 Test Bank for Intermediate Accounting. 4-96—Multiple-step income statement.000 (100.000 .000) 400.000 Instructions Prepare in good form a multiple-step income statement for the year 2007. net of tax Net income $3. Solution 4-96 Holt Company INCOME STATEMENT For the Year Ended December 31.000 100.400.000 1.000 (120.50 (2.400.000 shares of common stock were outstanding during the year.000 240.000 290.000 (203.000 780. Assume a 30% tax rate and that 80.4 .96 $1.000) 280.600 780. 000 $4. the following information.11 (.53) 3.70) $2. operations Discontinued operations. 1. which has not been considered. Vincent experienced an uninsured earthquake loss in the amount of $200. (Depreciation has been properly recorded. 2007 Income from continuing operations Discontinued operations Loss on disposal of a component of a business.000. less applicable income taxes. In addition. 2. net of applicable income taxes of $60.000 Income before extraordinary item Extraordinary loss.000." Assume that Vincent's tax rate is 30% and 200. During the current year.) The company often sells machinery of this type. Vincent Corporation had income from continuing operations of $800. operations (unadjusted) $800. Instructions Present in good form the income statement of Vincent Corporation for 2007 starting with "income from continuing operations. Vincent decided to discontinue its stereo division in 2007.000 (140.000 Income from cont.000 cash during the year at a time when its book value was $110.000* (105. 4-97—Income statement form. In 2007.000 Gain on sale of machinery (after tax) 21.58 (.000 less applicable taxes.000 (after taxes) in 2007.29 Pr. $45.000) $576.88 .000 Net income Per share of common stock—Income from cont. the loss on the disposal of this component of the business was $150. A machine was sold for $140. net of tax Income before extraordinary item Extraordinary loss. 3. Solution 4-97 Vincent Corporation Partial Income Statement For the Year Ended December 31. is as follows. net of tax Net income *Income from cont.000 shares of common stock were outstanding during the year. $150.000 $821.Income Statement and Related Information 4 .000.000) 716. operations (adjusted) $821. 000) 183. Jensen Corporation has 50.000 (30. Twelfth Edition Pr.000 $ 58.000) (215.000 215.100 Instructions Prepare a multiple-step income statement for 2007 for Jensen Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology).000 176.100 21. 2007 Sales revenue Investment revenue Cost of merchandise sold Selling expenses Administrative expense Interest expense Income before special items Special items Loss on disposal of a component of the business Major casualty loss (extraordinary item) Net federal income tax liability Net income $945.000 13. Jensen Corporation INCOME STATEMENT December 31.500 $145. 2007 Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Other revenue: Investment revenue $945. net of applicable income tax of $9.000) (24.000 Income before extraordinary item Extraordinary casualty loss.000 107.000) (13.500) (145. Shown below is an income statement for 2007 that was prepared by a poorly trained bookkeeper of Jensen Corporation.000 Other expenses: Interest expense Income from continuing operations before taxes Income taxes Income from continuing operations Loss from discontinued operations.000 183. Round all earnings per share figures to the nearest cent.100 49.000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items.100 .500 19.900 128.000 54.900) $ 58.000 Net income 360.30 Test Bank for Intermediate Accounting.000) (70.000 19.500 536. net of applicable income tax of $21.500 (408.000 408.500 196.4 . Solution 4-98 Jensen Corporation INCOME STATEMENT For the Year Ended December 31. 4-98—Multiple-step income statement. 2007.000 $ 49.000 instead of $21.56 (. income taxes for 2007 would have been $24.31 Solution 4-98 (cont. and administrative expenses Other. general. "Selling.) Per share of common stock— Income from continuing operations Discontinued operations loss net of tax Income before extraordinary item Extraordinary item. 2007 Net sales Costs and expenses: Cost of goods sold Selling. and an extraordinary loss of $10.000 70. 4-99—Single-step income statement. Presented below is an income statement for Morton Company for the year ended December 31.000 due to a loss on the sale of investments. If the extraordinary loss had not occurred.98) $1. Instructions Using the single-step format. including the appropriate per share disclosures.000 before taxes due to earthquake damage.000 70.000 730. 4.000.000 640.14 (.16 Pr. Morton Company Income Statement For the Year Ended December 31. prepare a corrected income statement.000 Additional information: 1.000 20. .000 shares of common stock outstanding during 2007.Income Statement and Related Information 4 . "Other.42) 2. net" consisted of interest expense. net Total costs and expenses Income before income taxes Income taxes Net income $800. $10. net of tax Net income $2. Morton had 20. 2.000. and administrative expenses" included a usual but infrequent charge of $7. general.000 21. 000 80.000 7.000 10.000) $ 49.000 63.80 (.000 10.4 . general.000 24. net of tax Net income $800.000 56.000 720. 2007 Net sales Costs and expenses: Cost of goods sold Selling.000 $2.000 .45 (7.32 Test Bank for Intermediate Accounting. and administrative expenses Interest expense Infrequent charge—loss on sale of investments Total costs and expenses Income before taxes and extraordinary item Income taxes Income before extraordinary item Extraordinary loss Earthquake damage Less applicable taxes Net income Per share of common stock— Income before extraordinary item Extraordinary loss.35) $2. Twelfth Edition Solution 4-99 Morton Company Income Statement For the Year Ended December 31.000 3.000 $640. 000 shares of common stock.000 The amount of income taxes applicable to ordinary income was $48.400 1.000 128.000 60.000 642. 2007 Inventory.000 152.000 200. excluding the tax effect of the earthquake loss which amounted to $18.000 29. Instructions (a) Prepare a multiple-step income statement.33 Pr.000 370. December 31.000 60.000 42.000. January 1.000 100. 2007 Interest expense General and administrative expenses Dividends declared Allowance for doubtful accounts Notes payable (maturity 7/1/10) Machinery and equipment Materials and supplies Accounts payable $1.000 290. 4-100—Income statement and retained earnings statement.000 90.000 5.000 17.000 200.000 40.000 450. (b) Prepare a retained earnings statement. At December 31.600.100.Income Statement and Related Information 4 . Malone Corporation's capital structure consists of 50. .000 150. January 1. 2007 an analysis of the accounts and discussions with company officials revealed the following information: Sales Purchase discounts Purchases Earthquake loss (net of tax) (extraordinary item) Selling expenses Cash Accounts receivable Common stock Accumulated depreciation Dividend revenue Inventory.000 18.000 180.000 125.000 4. 2007 Unearned service revenue Accrued interest payable Land Patents Retained earnings.000 8. 000 128.4 . 2007 Retained earnings.000 $152.000) 162.000) (9.000) 71. net of applicable taxes of $18. December 31.000 (17.000 18.000 651.000 $642.000 150. Twelfth Edition Solution 4-100 Malone Corporation INCOME STATEMENT For the Year Ended December 31. Jan.100..400 $2.000 Per share of common stock— Income before extraordinary item Extraordinary loss.000 171. January 1.000 48.400 .000 $71.000 449.84) $1.400 $ (42.000 776.000 278.000 8. net of tax Net income 624.000 Net income $1. 2007 Add: Net income Deduct: Dividends declared Retained earnings.000 42. 2007 $290.600 113.400 $332.34 Test Bank for Intermediate Accounting. 31 Cost of goods sold Gross profit on sales Operating expenses: Selling expenses General and administrative expenses Total operating expenses Operating income Other revenue and expense: Dividend revenue Interest expense Income before taxes Income taxes Income before extraordinary item Extraordinary loss due to earthquake. 1 Purchases Less purchase discounts Net purchases Merchandise available for sale Less merchandise inv.27 (.400 29.000 125.43 Malone Corporation RETAINED EARNINGS STATEMENT For the Year Ended December 31. Dec. 2007 Sales Cost of goods sold: Merchandise inventory.
Report "Ch04 Income Statement and Related Information"