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EXERCISE 4-3

LeRoi Jones Inc.


Income Statement
For Year Ended December 31, 2007
Revenues
Net sales ($1,250,000(b) $17,000)........................................

$1,233,000

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

500,000

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

400,000(c)

Administrative expenses.......................................................

100,000(a)

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

20,000

Total expenses.............................................................

1,020,000

Income before income tax.................................................................

213,000

Income tax..............................................................................

63,900

Net income

$ 149,100

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

*Rounded

7.46*

EXERCISE 4-3 (Continued)


Determination of amounts
(a)

Administrative expenses

= 20% of cost of good sold


= 20% of $500,000
= $100,000

(b)

Gross sales X 8%

= administrative expenses
= $100,000 8%
= $1,250,000

(c)

Selling expenses

= four times administrative expenses.


(operating expenses consist of selling
and administrative expenses; since
selling expenses are 4/5 of operating
expenses, selling expenses are 4
times administrative expenses.)
= 4 X $100,000
= $400,000

Earnings per share $7.46 ($149,100 20,000)


Note: An alternative income statement format is to show income tax a part
of expenses, and not as a separate item. In this case, total expenses are
$1,083,900.

EXERCISE 4-4
(a)

Multiple-Step Form
P. Bride Company
Income Statement
For the Year Ended December 31, 2007
(In thousands, except earnings per share)

Sales

$96,500

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

60,570

Gross profit on sales........................................................

35,930

Operating Expenses
Selling expenses
Sales commissions..............................................

$7,980

Depr. of sales equipment.....................................

6,480

Transportation-out................................................

2,690

$17,150

Administrative expenses
Officers salaries...................................................

4,900

Depr. of office furn. and equip.............................

3,960

Income from operations.................................

8,860

26,010
9,920

Other Revenues and Gains


Rental revenue............................................................

17,230
27,150

Other Expenses and Losses


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

1,860

Income before income tax...............................................

25,290

Income tax...................................................................

9,070

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

$16,220

Earnings per share ($16,220 40,550)...........................

$.40

EXERCISE 4-4 (Continued)


(b)

Single-Step Form
P. Bride Company
Income Statement
For the Year Ended December 31, 2007
(In thousands, except earnings per share)

Revenues
Net sales...............................................................................................

$ 96,500

Rental revenue.....................................................................................

17,230

Total revenues...............................................................................

113,730

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

60,570

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

17,150

Administrative expenses....................................................................

8,860

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

1,860

Total expenses...............................................................................

88,440

Income before income tax........................................................................

25,290

Income tax..................................................................................................

9,070

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

$ 16,220

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

$.40

Note: An alternative income statement format for the single-step form is to


show income tax a part of expenses, and not as a separate item.
(c)

Single-step:
1.
Simplicity and conciseness.
2.
Probably better understood by users.
3.
Emphasis on total costs and expenses and net income.
4.
Does not imply priority of one revenue or expense over
another.

Multiple-step:
1.
Provides more information through segregation of operating
and nonoperating items.
2.
Expenses are matched with related revenue.
PROBLEM 4-1
American Horse Company
Income Statement
For the Year Ended December 31, 2007
Sales...........................................................................................

$25,000,000

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

17,000,000

Gross profit................................................................................

8,000,000

Selling and administrative expenses......................................

4,700,000

Income from operations...........................................................

3,300,000

Other revenues and gains


Interest revenue............................................................

$ 70,000

Gain on the sale of investments.................................

110,000

180,000

Other expenses and losses


Write-off of goodwill.....................................................

820,000

Income from continuing operations before


income tax.............................................................................

2,660,000

Income tax.................................................................................

905,000

Income from continuing operations.......................................

1,755,000

Discontinued operations
Loss on operations, net of tax....................................

90,000

Loss on disposal, net of tax........................................

440,000

530,000

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

1,225,000

Extraordinary itemloss from flood damage,


net of tax................................................................................
Net income.................................................................................

390,000
$

835,000

PROBLEM 4-1 (Continued)


Earnings per share:
Income from continuing operations...................................

$ 5.62a

Discontinued operations
Loss on operations, net of tax..................................

$( .30)

Loss on disposal, net of tax......................................

(1.47)

(1.77)

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

3.85b

Extraordinary loss, net of tax..............................................

(1.30)

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

$ 2.55c

American Horse Company


Retained Earnings Statement
For the Year Ended December 31, 2007
Retained earnings, January 1...............................................

980,000

Add: Net income.....................................................................

835,000
1,815,000

Less: Dividends
Preferred stock...........................................................

$ 70,000

Common stock............................................................

250,000

Retained earnings, December 31.........................................

$1,755,000 $70,000
300,000 shares

$1,225,000 $70,000
300,000 shares

$835,000 $70,000
300,000 shares

= $5.62

= $3.85

= $2.55

320,000
$ 1,495,000

EXERCISE 5-1

(a) If the investment in preferred stock is readily marketable and held


primarily for sale in the near term to generate income on short-term
price differences, then the account should appear as a current asset
and be included with trading securities. If, on the other hand, the
preferred stock is not a trading security, it should be classified as
available for sale. Available for sale securities are classified as current
or noncurrent depending upon the circumstances.

(b) If the company accounts for the treasury stock on the cost basis, the
account should properly be shown as a reduction of total stockholders
equity.

(c) Stockholders equity.


(d) Current liability.
(e) Property, plant, and equipment (as a deduction).
(f) If the warehouse in process of construction is being constructed for
another party, it is properly classified as an inventory account in the
current asset section. This account will be shown net of any billings on
the contract. On the other hand, if the warehouse is being constructed
for the use of this particular company, it should be classified as a
separate item in the property, plant, and equipment section.

(g) Current asset.


(h) Current liability.
(i) Retained earnings.
(j) Current asset.
(k) Current liability.
(l) Current liability.
(m) Current asset (inventory).
(n) Current liability.

EXERCISE 5-13
(a)

4.

(f)

1.

(k)

1.

(b)

3.

(g)

5.

(l)

2.

(c)

4.

(h)

4.

(m)

2.

(d)

3.

(i)

5.

(e)

1.

(j)

4.

EXERCISE 5-17
(a)

Grant Wood Corporation


Statement of Cash Flows
For the Year Ended December 31, 2007

Cash flows from operating activities


Net income..................................................................................
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of equipment................................................. $ 2,000*
Depreciation expense.......................................................... 13,000
Patent amortization.............................................................
2,500
Increase in current liabilities.............................................. 13,000
Increase in current assets (other than cash)........................ (29,000)
Net cash provided by operating activities..............................
Cash flows from investing activities
Sale of equipment...................................................................... 10,000
Addition to building................................................................... (27,000)
Investment in stock................................................................... (16,000)
Net cash used by investing activities......................................
Cash flows from financing activities
Issuance of bonds..................................................................... 50,000
Payment of dividends................................................................ (30,000)
Purchase of treasury stock...................................................... (11,000)
Net cash provided by financing activities...............................
Net increase in cash........................................................................

$55,000

1,500
56,500

(33,000)

9,000
$32,500a

*[$10,000 ($20,000 $8,000)]


a
An additional proof to arrive at the increase in cash is provided as follows:
Total current assetsend of period
Total current assetsbeginning of period
Increase in current assets during the period
Increase in current assets other than cash
Increase in cash during year

$296,500 [from part (b)]


235,000
61,500
29,000
$ 32,500

EXERCISE 5-17 (Continued)


(b)

Grant Wood Corporation


Balance Sheet
December 31, 2007

Assets
Current assets...............................................................
Long-term investments................................................
Property, plant, and equipment
Land.........................................................................
Building ($120,000 + $27,000)................................
Less: Accum. depreciation
($30,000 + $4,000)................................................
Equipment ($90,000 $20,000)..............................
Less: Accum. depreciation
($11,000 $8,000 + $9,000).................................
Total property, plant, and equipment...................
Intangible assetspatents
($40,000 $2,500)................................................
Total assets......................................................

$296,500b
16,000

$147,000

$ 30,000

(34,000)
70,000

113,000

(12,000)

58,000

201,000
37,500
$551,000

Liabilities and Stockholders Equity


Current liabilities ($150,000 + $13,000)........................................
Long-term liabilities
Bonds payable ($100,000 + $50,000)......................................
Total liabilities.....................................................................
Stockholders equity
Common stock..........................................................................
Retained earnings ($44,000 + $55,000 $30,000)........................
Total paid-in capital and retained earnings........................
Less: Cost of treasury stock...................................................
Total stockholders equity.................................................
Total liabilities and stockholders equity.........................
b

$163,000
150,000
313,000
$180,000
69,000
249,000
(11,000)

238,000
$551,000

The amount determined for current assets could be computed last and then is a
plug figure. That is, total liabilities and stockholders equity is computed because
information is available to determine this amount. Because the total assets amount is
the same as total liabilities and stockholders equity amount, the amount of total
assets is determined. Information is available to compute all the asset amounts except
current assets and therefore current assets can be determined by deducting the total
of all the other asset balances from the total asset balance (i.e., $551,000 $37,500
$201,000 $16,000). Another way to compute this amount, given the information, is
that beginning current assets plus the $29,000 increase in current assets other than
cash plus the $32,500 increase in cash equals $296,500.

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