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Chapter4: The Income Statement and Statement of Cash Flows

Problems

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

P 4-1
 
Comparative income statements; multiple-step format
 
 LO1 LO3  through LO8


Selected information about income statement accounts for the Reed Company are presented below (the company's fiscal year ends on December 31):

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   On July 1, 2011, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2011, for $50,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:

p. 220

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   In addition to the account balances above, several events occurred during 2011 that have not yet been reflected in the above accounts:

1.

 

A fire caused $50,000 in uninsured damages to the main office building. The fire was considered to be an infrequent but not unusual event.

2.

 

An earthquake caused $100,000 in property damage to one of Reed's factories. The amount of the loss is material and the event is considered unusual and infrequent.

3.

 

Inventory that had cost $40,000 had become obsolete because a competitor introduced a better product. The inventory was sold as scrap for $5,000.

4.

 

Income taxes have not yet been accrued.

Required:

Prepare a multiple-step income statement for the Reed Company for 2011, showing 2010 information in comparative format, including income taxes computed at 40% and EPS disclosures assuming 300,000 shares of common stock.

P 4-2
 
Discontinued operations
 
LO4

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2011 and 2010:

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   On October 15, 2011, Jackson entered into a tentative agreement to sell the assets of one of its divisions. The division comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. The division was sold on December 31, 2011, for $5,000,000. Book value of the division's assets was $4,400,000. The division's contribution to Jackson's operating income before-tax for each year was as follows:

        2011

$400,000 loss

        2010

$300,000 loss

   Assume an income tax rate of 40%.

Required:

1.

 

Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

2.

 

Assume that by December 31, 2011, the division had not yet been sold but was considered held for sale. The fair value of the division's assets on December 31 was $5,000,000. How would the presentation of discontinued operations be different from your answer to requirement 1?

3.

 

Assume that by December 31, 2011, the division had not yet been sold but was considered held for sale. The fair value of the division's assets on December 31 was $3,900,000. How would the presentation of discontinued operations be different from your answer to requirement 1?

P 4-3
 
Income statement presentation
 
 LO4 LO5 LO7

For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes of $1,200,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material.

p. 221

1.

 

During 2011, one of Micron's factories was damaged in an earthquake. As a result, the firm recognized a loss of $800,000. The event is considered unusual and infrequent.

2.

 

In November of 2011, Micron sold its Waffle House restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May of 2011. The operating income of the chain from January 1, 2011, through November was $160,000 and the loss on sale of the chain's assets was $300,000.

3.

 

In 2011, Micron sold one of its six factories for $1,200,000. At the time of the sale, the factory had a carrying value of $1,100,000. The factory was not considered a component of the entity.

4.

 

In 2009, Micron's accountant omitted the annual adjustment for patent amortization expense of $120,000. The error was not discovered until December 2011.

Required:

1.

 

Prepare Micron's income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2011. Assume an income tax rate of 30%. Ignore EPS disclosures.

2.

 

Briefly explain the motivation for segregating certain income statement events from income from continuing operations.

P 4-4
 
Income statement presentation; unusual items
 
 LO3 LO5 LO7

The preliminary 2011 income statement of Alexian Systems, Inc., is presented below:

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Additional information:

1.

 

Selling and administrative expenses include $26 million in restructuring costs.

2.

 

Included in other income is an extraordinary gain of $120 million. The remaining $6 million is from the gain on sale of investments.

3.

 

Cost of goods sold was increased by $5 million to correct an error in the calculation of 2010's ending inventory. The amount is material.

Required:

For each of the three additional facts listed above, discuss the appropriate presentation of the item described. Do not prepare a revised statement.

P 4-5
 
Income statement presentation; unusual items
 
 LO1 LO3  LO5 LO7 LO8

[This is a variation of the previous problem focusing on income statement presentation.]

Required:

Refer to the information presented in Problem 4-4. Prepare a revised income statement for 2011 reflecting the additional facts. Use a multiple-step format. Assume that an income tax rate of 40% applies to all income statement items, and that 20 million shares of common stock were outstanding throughout the year.

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P 4-6
 
Income statement presentation
 
 LO1 LO3  through  LO5 LO8

Rembrandt Paint Company had the following income statement items for the year ended December 31, 2011 ($ in 000s):

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p. 222

   In addition, during the year the company completed the disposal of its plastics business and incurred a loss from operations of $1.6 million and a gain on disposal of the component's assets of $2 million. 500,000 shares of common stock were outstanding throughout 2011. Income tax expense has not yet been accrued. The income tax rate is 30% on all items of income (loss).

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Required:

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

P 4-7
 
Income statement presentation; unusual items
 
 LO1 LO3 LO4 LO7 LO8 LO9


The following income statement items appeared on the adjusted trial balance of Schembri Manufacturing Corporation for the year ended December 31, 2011 ($ in 000s): sales revenue, $15,300; cost of goods sold, $6,200; selling expenses, $1,300; general and administrative expenses, $800; interest revenue, $85; interest expense, $180. Income taxes have not yet been accrued. The company's income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company's income statement every year. The company's controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2011 ($ in 000s). All transactions are material in amount.

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1.

 

Investments were sold during the year at a loss of $220. Schembri also had unrealized gains of $320 for the year on investments accounted for as securities available for sale.

2.

 

One of the company's factories was closed during the year. Restructuring costs incurred were $1,200.

3.

 

An earthquake destroyed a warehouse causing $2,000 in damages. The event is considered to be unusual and infrequent.

4.

 

During the year, Schembri completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP. The division had incurred an operating loss of $560 in 2011 prior to the sale, and its assets were sold at a gain of $1,400.

5.

 

In 2011, the company's accountant discovered that depreciation expense in 2010 for the office building was understated by $200.

6.

 

Foreign currency translation losses for the year totaled $240.

Required:

Prepare Schembri's combined statement of income and comprehensive income for 2011, including basic earnings per share disclosures. One million shares of common stock were outstanding at the beginning of the year and an additional 400,000 shares were issued on July 1, 2011.

P 4-8
 
Multiple-step statement of income and comprehensive income
 
 LO1 LO3 LO7 LO9


Duke Company's records show the following account balances at December 31, 2011:

        Sales................................................................................

$15,000,000

        Cost of goods sold..........................................................

9,000,000

        General and administrative expenses.................................

1,000,000

        Selling expenses..............................................................

500,000

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

700,000

   Income tax expense has not yet been determined. The following events also occurred during 2011. All transactions are material in amount.

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1.

 

$300,000 in restructuring costs were incurred in connection with plant closings.

2.

 

The company operates a factory in South America. During the year, the foreign government took over (expropriated) the factory and paid Duke $1,000,000, which was one-fourth of the book value of the assets involved.

3.

 

Inventory costing $400,000 was written off as obsolete. Material losses of this type are not considered to be unusual.

4.

 

It was discovered that depreciation expense for 2010 was understated by $50,000 due to a mathematical error.

5.

 

The company experienced a foreign currency translation adjustment loss of $200,000 and had unrealized gains on securities available for sale of $180,000.

Required:

Prepare a combined multiple-step statement of income and comprehensive income for 2011. The company's effective tax rate on all items affecting comprehensive income is 40%. Each component of other comprehensive income should be displayed net of tax. Ignore EPS disclosures.

P 4-9
 
Statement of cash flows
 
 LO11

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2011, appears below:

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p. 223

The following balance sheet information also is available:

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   In addition, the following transactions took place during the year:

1.

 

Common stock was issued for $100,000 in cash.

2.

 

Long-term investments were sold for $50,000 in cash. The original cost of the investments also was $50,000.

3.

 

$80,000 in cash dividends was paid to shareholders.

4.

 

The company has no outstanding debt, other than those payables listed above.

5.

 

Operating expenses include $30,000 in depreciation expense.

Required:

1.

 

Prepare a statement of cash flows for 2011 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities.

2.

 

Prepare the cash flows from operating activities section of Diversified's 2011 statement of cash flows using the indirect method.

P 4-10
 
Integration of financial statements; Chapters 3 and 4
 
 LO11


The chief accountant for Grandview Corporation provides you with the company's 2011 statement of cash flows and income statement. The accountant has asked for your help with some missing figures in the company's comparative balance sheets. These financial statements are shown next ($ in millions).

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p. 224

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Required:

1.

 

Calculate the missing amounts.

2.

 

Prepare the operating activities section of Grandview's 2011 statement of cash flows using the indirect method.


P 4-11
 
Statement of cash flows; indirect method
 
 LO11


Presented below are the 2011 income statement and comparative balance sheets for Santana Industries.

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p. 225

   Additional information for the 2011 fiscal year ($ in thousands):

1.

 

Cash dividends of $1,000 were declared and paid.

2.

 

Equipment costing $4,000 was purchased with cash.

3.

 

Equipment with a book value of $500 (cost of $1,500 less accumulated depreciation of $1,000) was sold for $500.

4.

 

Depreciation of $1,600 is included in operating expenses.

Required:

Prepare Santana Industries' 2011 statement of cash flows, using the indirect method to present cash flows from operating activities.

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