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Chapter4: The Income Statement and Statement of Cash Flows

Exercises

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An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

E 4-1  Income statement format; single step and multiple step  
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The following is a partial trial balance for the Green Star Corporation as of December 31, 2011:

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   100,000 shares of common stock were outstanding throughout 2011.

Required:

1.

 

Prepare a single-step income statement for 2011, including EPS disclosures.

2.

 

Prepare a multiple-step income statement for 2011, including EPS disclosures.


E 4-2  Income statement format; single step and multiple step  
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p. 212

The following is a partial trial balance for General Lighting Corporation as of December 31, 2011:

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   300,000 shares of common stock were outstanding throughout 2011. Income tax expense has not yet been accrued. The income tax rate is 40%.

Required:

1.

 

Prepare a single-step income statement for 2011, including EPS disclosures.

2.

 

Prepare a multiple-step income statement for 2011, including EPS disclosures.


E 4-3  Multiple-step statement of income and comprehensive income  
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The trial balance for Lindor Corporation, a manufacturing company, for the year ended December 31, 2011, included the following income accounts:

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The trial balance does not include the accrual for income taxes. Lindor's income tax rate is 30%. One million shares of common stock were outstanding throughout 2011.

Required:

Prepare a combined multiple-step statement of income and comprehensive income for 2011, including appropriate EPS disclosures.


E 4-4  Income statement presentation; intraperiod tax allocation  
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The following incorrect income statement was prepared by the accountant of the Axel Corporation:

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Required:

Prepare a multiple-step income statement for 2011 applying generally accepted accounting principles. The income tax rate is 40%. The gain from litigation settlement is considered an unusual and infrequent event.


E 4-5  Discontinued operations  
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p. 213

Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both divisions are considered separate components as defined by generally accepted accounting principles. The farm equipment component had been unprofitable, and on September 1, 2011, the company adopted a plan to sell the assets of the division. The actual sale was effected on December 15, 2011, at a price of $600,000. The book value of the division's assets was $1,000,000, resulting in a before-tax loss of $400,000 on the sale.

   The division incurred before-tax operating losses of $130,000 from the beginning of the year through December 15. The income tax rate is 40%. Chance's after-tax income from its continuing operations is $350,000.

Required:

Prepare an income statement for 2011 beginning with income from continuing operations. Include appropriate EPS disclosures assuming that 100,000 shares of common stock were outstanding throughout the year.


E 4-6  Income statement presentation; discontinued operations; restructuring charges  
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Esquire Comic Book Company had income before tax of $1,000,000 in 2011 before considering the following material items:

1.

 

Esquire sold one of its operating divisions, which qualified as a separate component according to generally accepted accounting principles. The before-tax loss on disposal was $350,000. The division generated before-tax operating income from the beginning of the year through disposal of $500,000. Neither the loss on disposal nor the operating income is included in the $1,000,000 before-tax income the company generated from its other divisions.

2.

 

The company incurred restructuring costs of $80,000 during the year.

Required:

Prepare a 2011 income statement for Esquire beginning with income from continuing operations. Assume an income tax rate of 40%. Ignore EPS disclosures.


E 4-7  Discontinued operations; disposal in subsequent year  
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Kandon Enterprises, Inc., has two operating divisions; one manufactures machinery and the other breeds and sells horses. Both divisions are considered separate components as defined by generally accepted accounting principles. The horse division has been unprofitable, and on November 15, 2011, Kandon adopted a formal plan to sell the division. The sale was completed on April 30, 2012. At December 31, 2011, the component was considered held for sale.

   On December 31, 2011, the company's fiscal year-end, the book value of the assets of the horse division was $250,000. On that date, the fair value of the assets, less costs to sell, was $200,000. The before-tax operating loss of the division for the year was $140,000. The company's effective tax rate is 40%. The after-tax income from continuing operations for 2011 was $400,000.

Required:

1.

 

Prepare a partial income statement for 2011 beginning with income from continuing operations. Ignore EPS disclosures.

2.

 

Repeat requirement 1 assuming that the estimated net sales price of the horse division's assets was $400,000, instead of $200,000.


E 4-8  Discontinued operations; disposal in subsequent year; solving for unknown  
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On September 17, 2011, Ziltech, Inc. entered into an agreement to sell one of its divisions that qualifies as a component of the entity according to generally accepted accounting principles. By December 31, 2011, the company's fiscal year-end, the division had not yet been sold, but was being held for sale. The net fair value (fair value minus costs to sell) of the division's assets at the end of the year was $11 million. The pretax operating income of the division during 2011 was $4 million. Pretax income from continuing operations for the year totaled $14 million. The income tax rate is 40%. Ziltech reported net income for the year of $7.2 million.

Required:

Determine the book value of the division's assets on December 31, 2011.


E 4-9  Accounting change  
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Canliss Milling Company purchased machinery on January 2, 2009, for $800,000. A five-year life was estimated and no residual value was anticipated. Canliss decided to use the double-declining balance method and recorded depreciation of $320,000 in 2009 and $192,000 in 2010. Early in 2011, the company changed its depreciation method to the straight-line method.

Required:

1.

 

Briefly describe the way Canliss should report this accounting change in the 2010–2011 comparative financial statements.

2.

 

Prepare any 2011 journal entry related to the change.


E 4-10  Accounting change  
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p. 214

[This is a variation of the previous exercise]

Canliss Milling Company purchased machinery on January 2, 2009, for $800,000. A five-year life was estimated and no residual value was anticipated. Canliss decided to use the straight-line depreciation method and recorded $160,000 in depreciation in 2009 and 2010. Early in 2011, the company revised the total estimated life of the machinery to eight years.

Required:

1.

 

What type of accounting change is this?

2.

 

Briefly describe the accounting treatment for this change.

3.

 

Determine depreciation for 2011.


E 4-11  Accounting change  
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On July 1, 2009, Horrocks Engineering purchased a patent for $2,400,000. A 10-year useful life was estimated with no residual value. The straight-line amortization method is used. Early in 2012, the company determined that the patent would be useful for only five more years (2012–2016).

Required:

1.

 

What type of accounting change is this?

2.

 

Determine amortization expense for 2012.


E 4-12  Earnings per share  
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The Esposito Import Company had 1 million shares of common stock outstanding during 2011. Its income statement reported the following items: income from continuing operations, $5 million; loss from discontinued operations, $1.6 million; extraordinary gain, $2.2 million. All of these amounts are net of tax.

Required:

Prepare the 2011 EPS presentation for the Esposito Import Company.


E 4-13  Comprehensive income  
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The Massoud Consulting Group reported net income of $1,354,000 for its fiscal year ended December 31, 2011. In addition, during the year the company experienced a foreign currency translation adjustment gain of $240,000 and had unrealized losses on investment securities of $80,000. The company's effective tax rate on all items affecting comprehensive income is 30%. Each component of other comprehensive income is displayed net of tax.

Required:

1.

 

Prepare a combined statement of income and comprehensive income for 2011, beginning with net income.

2.

 

Prepare a separate statement of comprehensive income for 2011.


E 4-14  IFRS; reporting comprehensive income  
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Exercise 4-13 requires the presentation of other comprehensive income items in (1) a combined statement of income and comprehensive income and (2) in a separate statement of comprehensive income.

Required:

1.

 

What other option(s) are available for the presentation of other comprehensive income items according to U.S. GAAP?

2.

 

What options for the presentation of other comprehensive income items are available to companies complying with International Financial Reporting Standards?

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E 4-15  Statement of cash flows; classifications  
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The statement of cash flows classifies all cash inflows and outflows into one of the three categories shown below and lettered from a through c. In addition, certain transactions that do not involve cash are reported in the statement as noncash investing and financing activities, labeled d.

a.

 

Operating activities

b.

 

Investing activities

c.

 

Financing activities

d.

 

Noncash investing and financing activities

Required:

For each of the following transactions, use the letters above to indicate the appropriate classification category.

1.

 

____Purchase of equipment for cash.

2.

 

____Payment of employee salaries.

3.

 

____Collection of cash from customers.

4.

 

____Cash proceeds from a note payable.

5.

 

____Purchase of common stock of another corporation for cash.

6.

 

____Issuance of common stock for cash.

7.

 

____Sale of machinery for cash.

8.

 

____Payment of interest on note payable.

9.

 

____Issuance of bonds payable in exchange for land and building.

10.

 

____Payment of cash dividends to shareholders.

11.

 

____Payment of principal on note payable.


E 4-16  Statement of cash flows preparation  
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p. 215

The following summary transactions occurred during 2011 for Bluebonnet Bakers:

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   The balance of cash and cash equivalents at the beginning of 2011 was $17,000.

Required:

Prepare a statement of cash flows for 2011 for Bluebonnet Bakers. Use the direct method for reporting operating activities.


E 4-17  IFRS; statement of cash flows  
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Refer to the situation described in Exercise 4-16.

Required:

How might your solution differ if Bluebonnet Bakers prepares the statement of cash flows according to International Financial Reporting Standards?

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E 4-18  Indirect method; reconciliation of net income to net cash flows from operating activities  
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The accounting records of Hampton Company provided the data below ($ in 000s).

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Required:

Prepare a reconciliation of net income to net cash flows from operating activities.


E 4-19  Statement of cash flows directly from transactions  
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The following transactions occurred during March 2011 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. [These are the same transactions analyzed in Exercise 2-1, when we determined their effect on elements of the accounting equation.]

1.

 

Issued 30,000 shares of capital stock in exchange for $300,000 in cash.

2.

 

Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable was signed for the balance owed.

3.

 

Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.

4.

 

Credit sales for the month totaled $120,000. The cost of the goods sold was $70,000.

5.

 

Paid $5,000 in rent on the warehouse building for the month of March.

6.

 

Paid $6,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2011.

7.

 

Paid $70,000 on account for the merchandise purchased in 3.

8.

 

Collected $55,000 from customers on account.

9.

 

Recorded depreciation expense of $1,000 for the month on the equipment.

Required:

1.

 

Analyze each transaction and classify each as a financing, investing and/or operating activity (a transaction can represent more than one type of activity). In doing so, also indicate the cash effect of each, if any. If there is no cash effect, simply place a check mark (√) in the appropriate column(s).

   Example:

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2.

 

Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was $40,000.


E 4-20 Statement of cash flows, indirect method  
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p. 216

Cemptex Corporation prepares its statement of cash flows using the indirect method to report operating activities. Net income for the 2011 fiscal year was $624,000. Depreciation and amortization expense of $87,000 was included with operating expenses in the income statement. The following information describes the changes in current assets and liabilities other than cash:

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Required:

Prepare the operating activities section of the 2011 statement of cash flows.


E 4-21  IFRS; statement of cash flows  
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The statement of cash flows for the year ended December 31, 2011, for Bronco Metals is presented below.

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Required:

Prepare the statement of cash flows assuming that Bronco prepares its financial statements according to International Financial Reporting Standards. Where IFRS allows flexibility, use the classification used most often in IFRS financial statements.


E 4-22  Statement of cash flows; indirect method  
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Presented below is the 2011 income statement and comparative balance sheet information for Tiger Enterprises.

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p. 217

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Required:

Prepare Tiger's statement of cash flows, using the indirect method to present cash flows from operating activities. (Hint: You will have to calculate dividend payments.)


E 4-23  Statement of cash flows; direct method  
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Refer to the situation described in Exercise 4-22.

Required:

Prepare the cash flows from operating activities section of Tiger's 2011 statement of cash flows using the direct method. Assume that all purchases and sales of inventory are on account, and that there are no anticipated bad debts for accounts receivable. (Hint: Use T-accounts for the pertinent items to isolate the information needed for the statement.)


E 4-24  FASB codification research  
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The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.

Required:

1.

 

Obtain the relevant authoritative literature on earnings per share using the FASB's Codification Research System at the FASB website (www.fasb.org). Identify the Codification topic number that provides the accounting for earnings per share.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/820130/code.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (14.0K)</a>

2.

 

What is the specific citation that describes the additional information for earnings per share that must be included in the notes to the financial statements?

3.

 

Describe the required disclosures.


E 4-25  FASB codification research  
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a>  LO5  LO8  LO9  LO11

Access the FASB's Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for each of the following items:

1.

 

The criteria for determining if a gain or loss should be reported as an extraordinary item.

2.

 

The calculation of the weighted average number of shares for basic earnings per share purposes.

3.

 

The alternative formats permissible for reporting comprehensive income.

4.

 

The classifications of cash flows required in the statement of cash flows.

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E 4-26  Concepts; terminology  
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Listed below are several terms and phrases associated with income statement presentation and the statement of cash flows. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it.

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