Solutions Manual and Test Bank Intermediate Accounting Kieso Weygandt Warfield 14th edition

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CHAPTER 4
INCOME STATEMENT AND RELATED INFORMATION
MULTIPLE CHOICE—Conceptual

   21.       The major elements of the income statement are
a.     revenue, cost of goods sold, selling expenses, and general expense.
b.     operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.
c.     revenues, expenses, gains, and losses.
d.     all of these.

   22.       Information in the income statement helps users to
a.     evaluate the past performance of the enterprise.
b.     provide a basis for predicting future performance.
c.     help assess the risk or uncertainty of achieving future cash flows.
d.     all of these.

   23.       Limitations of the income statement include all of the following except
a.     items that cannot be measured reliably are not reported.
b.     only actual amounts are reported in determining net income.
c.     income measurement involves judgment.
d.     income numbers are affected by the accounting methods employed.

  S24.       Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
a.     Use by customers to determine a company's ability to provide needed goods and services.
b.     Use by labor unions to examine earnings closely as a basis for salary discussions.
c.     Use by government agencies to formulate tax and economic policy.
d.     Use by investors interested in the financial position of the entity.
  S25.       The income statement reveals
a.     resources and equities of a firm at a point in time.
b.     resources and equities of a firm for a period of time.
c.     net earnings (net income) of a firm at a point in time.
d.     net earnings (net income) of a firm for a period of time.

   26.       The income statement information would help in which of the following tasks?
a.     Evaluate the liquidity of a company.
b.     Evaluate the solvency of a company
c.     Estimate future cash flows
d.     Estimate future financial flexibility

   27.       Which of the following is an example of managing earnings down?
a.     Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b.     Revising the estimated life of equipment from 10 years to 8 years.
c.     Not writing off obsolete inventory.
d.     Reducing research and development expenditures.

   28.       Which of the following is an example of managing earnings up?
a.     Decreasing estimated salvage value of equipment.
b.     Writing off obsolete inventory.
c.     Underestimating warranty claims.
d.     Accruing a contingent liability for an ongoing lawsuit.

   29.       What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?
a.     Increase research and development activities.
b.     Relax credit policies for customers.
c.     Delay shipments to customers until after the end of the fiscal year.
d.     Delay purchases from suppliers until after the end of the fiscal year.

   30.       What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?
a.     Delay shipments to customers until after the end of the fiscal year.
b.     Relax credit policies for customers.
c.     Pay suppliers all amounts owed.
d.     Delay purchases from suppliers until after the end of the fiscal year.

   31.       Which of the following is an advantage of the single-step income statement over the multiple-step income statement?
a.     It reports gross profit for the year.
b.     Expenses are classified by function.
c.     It matches costs and expenses with related revenues.
d.     It does not imply that one type of revenue or expense has priority over another.

   32.       The single-step income statement emphasizes
a.     the gross profit figure.
b.     total revenues and total expenses.
c.     extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement.
d.     the various components of income from continuing operations.

   33.       Which of the following is an acceptable method of presenting the income statement?
a.     A single-step income statement
b.     A multiple-step income statement
c.     A consolidated statement of income
d.     All of these

   34.       Which of the following is not a generally practiced method of presenting the income statement?
a.     Including prior period adjustments in determining net income
b.     The single-step income statement
c.     The consolidated statement of income
d.     Including gains and losses from discontinued operations of a component of a business in determining net income

   35.       The occurrence which most likely would have no effect on 2012 net income (assuming that all amounts involved are material) is the
a.     sale in 2012 of an office building contributed by a stockholder in 1983.
b.     collection in 2012 of a receivable from a customer whose account was written off in 2011 by a charge to the allowance account.
c.     settlement based on litigation in 2012 of previously unrecognized damages from a serious accident which occurred in 2010.
d.     worthlessness determined in 2012 of stock purchased on a speculative basis in 2008.

S36.  The occurrence that most likely would have no effect on 2012 net income is the
a.     sale in 2012 of an office building contributed by a stockholder in 1961.
b.     collection in 2012 of a dividend from an investment.
c.     correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d.     stock purchased in 1996 deemed worthless in 2012.

  P37.   Which of the following is not a selling expense?
a.     Advertising expense
b.     Office salaries expense
c.     Freight-out
d.     Store supplies consumed

  P38.       The accountant for the Lintz Sales Company is preparing the income statement for 2012 and the balance sheet at December 31, 2012. The January 1, 2012 merchandise inventory balance will appear
a.     only as an asset on the balance sheet.
b.     only in the cost of goods sold section of the income statement.
c.     as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
d.     as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.

   39.       In order to be classified as an extraordinary item in the income statement, an event or transaction should be
a.     unusual in nature, infrequent, and material in amount.
b.     unusual in nature and infrequent, but it need not be material.
c.     infrequent and material in amount, but it need not be unusual in nature.
d.     unusual in nature and material, but it need not be infrequent.
   40.       Classification as an extraordinary item on the income statement would be appropriate for the
a.     gain or loss on disposal of a component of the business.
b.     substantial write-off of obsolete inventories.
c.     loss from a strike.
d.     none of these.

   41.       Which of these is generally an example of an extraordinary item?
a.     Loss incurred because of a strike by employees.
b.     Write-off of deferred marketing costs believed to have no future benefit.
c.     Gain resulting from the devaluation of the U.S. dollar.
d.     Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.

   42.       Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?
a.     Only if floods in the geographical area are unusual in nature and occur infrequently.
b.     Only if the flood damage is material in amount and could have been reduced by prudent management.
c.     Under any circumstances as an extraordinary item.
d.     Flood damage should never be classified as an extraordinary item.

   43.       An item that should be classified as an extraordinary item is
a.     write-off of goodwill.
b.     gains from transactions involving foreign currencies.
c.     losses from moving a plant to another city.
d.     gains from a company selling the only investment it has ever owned.

   44.       How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements?
a.     Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if deemed appropriate.
b.     Shown in operating revenues or expenses if material but not shown as a separate item.
c.     Shown net of income tax after ordinary net earnings but before extraordinary items.
d.     Shown net of income tax after extraordinary items but before net earnings.

   45.       Which of the following is a change in accounting principle?
a.     A change in the estimated service life of machinery
b.     A change from FIFO to LIFO
c.     A change from straight-line to double-declining-balance
d.     A change from FIFO to LIFO and a change from straight-line to double-declining- balance

   46.       Which of the following is never classified as an extraordinary item?
a.     Losses from a major casualty.
b.     Losses from an expropriation of assets.
c.     Gain on a sale of the only security investment a company has ever owned.
d.     Losses from exchange or translation of foreign currencies.


   47.       Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
a.     The gain or loss on disposal should be reported as an extraordinary item.
b.     Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

   48.       When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as
a.     a prior period adjustment.
b.     an extraordinary item.
c.     an amount after continuing operations and before extraordinary items.
d.     a bulk sale of plant assets included in income from continuing operations.

  S49.       A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement
               Net of Tax                Disclosed Separately
a.                  No                                       No
b.                  Yes                                      Yes
c.                   No                                      Yes
d.                  Yes                                       No

   50.       Income taxes are allocated to
a.     extraordinary items.
b.     discontinued operations.
c.     prior period adjustments.
d.     all of these.

   51.       Which of the following is true about intraperiod tax allocation?
a.     It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
b.     It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
c.     Its purpose is to allocate income tax expense evenly over a number of accounting periods.
d.     Its purpose is to relate the income tax expense to the items which affect the amount of tax.

   52.       Companies use intraperiod tax allocation for all of the following items except
a.     Discontinued operations.
b.     Extraordinary items.
c.     Changes in accounting estimates.
d.     Income from continuing operations.


   53.       Which of the following items would be reported net of tax on the face of the income statement?
a.     Prior period adjustment
b.     Unusual gain
c.     Cumulative effect of a change in an accounting principle
d.     Discontinued operations

   54.       Which of the following items would be reported at its gross amount on the face of the income statement?
a.     Extraordinary loss
b.     Prior period adjustment
c.     Cumulative effect of a change in an accounting principle
d.     Unusual gain

   55.       Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles?
a.     On the face of the statement of retained earnings (or, statement of stockholders' equity.)
b.     In the footnotes to the financial statements.
c.     On the face of the income statement.
d.     Either (a) or (c).

   56.       Which of the following earnings per share figures must be disclosed on the face of the income statement?
a.     EPS on income from continuing operations.
b.     The effect on EPS from operations of a discontinued division, net of taxes.
c.     The effect on EPS from an extraordinary item, net of taxes.
d.     All of the above.

   57.       Which of the following earnings per share figures must be disclosed on the face of the income statement?
a.     EPS for income before taxes.
b.     The effect on EPS from unusual items.
c.     EPS for gross profit.
d.     EPS for income from continuing operations.

  S58.       Earnings per share should always be shown separately for
a.     net income and gross margin.
b.     net income and pretax income.
c.     income before extraordinary items.
d.     extraordinary items and prior period adjustments.

  P59.       A correction of an error in prior periods' income will be reported
              In the income statement                 Net of tax
a.                              Yes                                          Yes
b.                              No                                           No
c.                              Yes                                           No
d.                              No                                          Yes


   60.       Which of the following items will not appear in the retained earnings statement?
a.     Net loss
b.     Prior period adjustment
c.     Discontinued operations
d.     Dividends

   61.       Which one of the following types of losses is excluded from the determination of net income in income statements?
a.     Material losses resulting from transactions in the company's investments account.
b.     Material losses resulting from unusual sales of assets not acquired for resale.
c.     Material losses resulting from the write-off of intangibles.
d.     Material losses resulting from correction of errors related to prior periods.

   62.       Watts 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. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
a.     an increase in depreciation expense for the year in which the error is discovered.
b.     a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
c.     an extraordinary item for the year in which the error was made.
d.     a prior period adjustment.

   63.       A company is not required to report a per share amount on the face of the income statement for which of the following items?
a.     Net income
b.     Prior period adjustment
c.     Extraordinary item
d.     Discontinued operations

   64.       Earnings per share data are required on the face of which of the following financial statements?
a.     Statement of retained earnings
b.     Statement of stockholders' equity
c.     Income statement
d.     Balance sheet

   65.       Which of the following is included in comprehensive income?
a.     Investments by owners.
b.     Unrealized gains on available-for-sale securities.
c.     Distributions to owners.
d.     Changes in accounting principles.

   66.       Which of the following is not an acceptable way of displaying the components of other comprehensive income?
a.     Combined statement of retained earnings
b.     Second income statement
c.     Combined statement of comprehensive income
d.     As part of the statement of stockholders' equity


   67.       Which disclosure method do most companies use to display the components of other comprehensive income?
a.     Combined statement of retained earnings
b.     Second income statement
c.     Combined statement of comprehensive income
d.     As part of the statement of stockholders' equity

   68.       Comprehensive income includes all of the following except
a.     dividend revenue.
b.     losses on disposal of assets.
c.     investments by owners.
d.     unrealized holding gains.

   69.       The approach most companies use to provide information related to the components of other comprehensive income is a
a.     second separate income statement.
b.     combined income statement of comprehensive income.
c.     separate column in the statement of changes in stockholders’ equity.
d.     footnote disclosure.

MULTIPLE CHOICE—Computational

   70.       Ortiz Co. had the following account balances:
                        Sales revenue                                          $  180,000
                        Cost of goods sold                                          90,000
                        Salaries and wages expense                        15,000
                        Depreciation expense                                    30,000
                        Dividend revenue                                              6,000
                        Utilities expense                                             12,000
                        Rent revenue                                                    30,000
                        Interest expense                                              18,000
                        Sales returns and allow.                               16,500
                        Advertising expense                                       19,500
What would Ortiz report as total revenues in a single-step income statement?
a.     $199,500
b.     $  15,000
c.        $216,000
d.       $180,000

   71.       Ortiz Co. had the following account balances:
                        Sales revenue                                          $  180,000
                        Cost of goods sold                                          90,000
                        Salaries and wages expense                        15,000
                        Depreciation expense                                    30,000
                        Dividend revenue                                              6,000
                        Utilities expense                                             12,000
                        Rent revenue                                                    30,000
                        Interest expense                                              18,000
                        Sales returns and allow.                               16,500
                        Advertising expense                                       19,500
What would Ortiz report as total expenses in a single-step income statement?
a.     $190,500
b.     $201,000
c.        $184,500
d.     $  94,500

   72.       For Mortenson Company, the following information is available:
Cost of goods sold                                                     $120,000
Dividend revenue                                                              5,000
Income tax expense                                                        12,000
Operating expenses                                                       46,000
Sales revenue                                                                200,000
                In Mortenson’s single-step income statement, gross profit
a.     should not be reported.
b.     should be reported at $27,000.
c.     should be reported at $80,000.
d.     should be reported at $85,000.


   73.       For Mortenson Company, the following information is available:
Cost of goods sold                                                     $120,000
Dividend revenue                                                              5,000
Income tax expense                                                        12,000
Operating expenses                                                       46,000
Sales revenue                                                                200,000
                In Mortenson’s multiple-step income statement, gross profit
a.     should not be reported
b.     should be reported at $27,000.
c.     should be reported at $80,000.
d.     should be reported at $85,000.

   74.       For Rondelli Company, the following information is available:
Cost of goods sold                                                     $270,000
Dividend revenue                                                            12,000
Income tax expense                                                        27,000
Operating expenses                                                     105,000
Sales revenue                                                                450,000
       In Rondelli's multiple-step income statement, gross profit
a.     should not be reported
b.     should be reported at $60,000.
c.     should be reported at $180,000.
d.     should be reported at $192,000.

   75.       Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a.     $12,720,000.
b.     $12,350,000.
c.     $12,175,000.
d.     $12,035,000.

   76.       If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related taxes of $500,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as
a.     a gain of $1,640,000 and an increase in income tax expense of $500,000.
b.     operating income net of applicable taxes, $1,140,000.
c.     a prior period adjustment net of applicable taxes, $1,140,000.
d.     an extraordinary item net of applicable taxes, $1,140,000.

   77.       Manning Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income taxes, what total amount should Manning Company report as extraordinary losses?
a.     $ -0-.
b.     $555,000.
c.     $699,000.
d.     $894,000.


   78.       Garwood Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000. Ignoring income taxes, what total amount should Garwood Company report as extraordinary losses?
a.     $339,000
b.     $555,000.
c.     $699,000.
d.     $894,000.

   79.       An income statement shows “income before income taxes and extraordinary items” in the amount of $2,740,000. The income taxes payable for the year are $1,440,000, including $480,000 that is applicable to an extraordinary gain. Thus, the “income before extraordinary items” is
a.     $1,780,000.
b.     $820,000.
c.     $1,860,000.
d.     $900,000.

   80.       Dole Company, with an applicable income tax rate of 30%, reported net income of $350,000. Included in income for the period was an extraordinary loss from flood damage of $50,000 before deducting the related tax effect. The company's income before income taxes and extraordinary items was
a.     $400,000.
b.     $500,000.
c.     $550,000.
d.     $385,000.

   81.       A review of the December 31, 2012, financial statements of Somer Corporation revealed that under the caption "extraordinary losses," Somer reported a total of $1,030,000. Further analysis revealed that the $1,030,000 in losses was comprised of the following items:
(1)   Somer recorded a loss of $300,000 incurred in the abandonment of equipment formerly used in the business.
(2)   In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a result of hurricane damage to a warehouse.
(3)   During 2012, several factories were shut down during a major strike by employees, resulting in a loss of $170,000.
(4)   Uncollectible accounts receivable of $60,000 were written off as uncollectible.
                Ignoring income taxes, what amount of loss should Somer report as extraordinary on its 2012 income statement?
a.     $300,000.
b.     $500,000.
c.     $800,000.
d.     $1,030,000.



   82.   At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%.
(1)     Depreciation for 2010 was found to be understated by $60,000.
(2)     A strike by the employees of a supplier resulted in a loss of $50,000.
(3)     The inventory at December 31, 2010 was overstated by $80,000.
(4)     A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area.

                The effect of these events and transactions on 2012 income from continuing operations net of tax would be
a.     ($35,000).
b.     ($77,000).
c.     ($133,000).
d.     ($833,000).

   83.   At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%.
(1)     Depreciation for 2010 was found to be understated by $60,000.
(2)     A strike by the employees of a supplier resulted in a loss of $50,000.
(3)     The inventory at December 31, 2010 was overstated by $80,000.
(4)     A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area.

                The effect of these events and transactions on 2012 net income net of tax would be
a.     ($35,000).
b.     ($735,000).
c.     ($777,000).
d.     ($833,000).

   84.       During 2012, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of $1,800,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were $2,100,000 in 2012. How should these facts be reported in Lopez's income statement for 2012?
                                Total Amount to be Included in                                   
                     Income from                                           Results of
           Continuing Operations                    Discontinued Operations
a.                 $2,100,000 loss                                $1,800,000 gain
b.                       300,000 loss                                            0
c.                             0                                                      300,000 loss
d.                   1,800,000 gain                                   2,100,000 loss

   85.       Sandstrom Corporation has an extraordinary loss of $150,000, an unusual gain of $105,000, and a tax rate of 40%. At what amount should Sandstrom report each item?
         Extraordinary loss                         Unusual gain
a.             $(150,000)                                   $105,000
b.               (150,000)                                       63,000
c.                  (90,000)                                     105,000
d.                 (90,000)                                       63,000

   86.       Prophet Corporation has an extraordinary loss of $600,000, an unusual gain of $420,000, and a tax rate of 40%. At what amount should Prophet report each item?
         Extraordinary loss                         Unusual gain
a.             $(600,000)                                   $420,000
b.               (600,000)                                     252,000
c.               (360,000)                                     420,000
d.               (360,000)                                     252,000

   87.       Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $464,000. It also has the following items (gross amounts).
                Unusual loss                                                                                             $  74,000
                Extraordinary loss                                                                                       202,000
                Gain on disposal of equipment                                                                   16,000
        Change in accounting principle
            increasing prior year's income                                                         106,000
                What is the amount of income tax expense Arreaga would report on its income statement?
a.     $185,600
b.     $162,400
c.     $198,400
d.     $124,000

   88.       Palomo Corp has a tax rate of 30 percent and income before non-operating items of $714,000. It also has the following items (gross amounts).
                Unusual gain                                                                                             $  46,000
                Loss from discontinued operations                                                         366,000
                Dividend revenue                                                                                            12,000
                Income increasing prior
                period adjustment                                                                               148,000
                What is the amount of income tax expense Palomo would report on its income statement?
a.     $231,600
b.     $121,800
c.        $166,200
d.     $217,800

   89.       Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what would be the income tax expense reported on the face of the income statement?
                        Sales revenue                                          $  300,000
                        Cost of goods sold                                       180,000
                        Salaries and wages expense                        24,000
                        Depreciation expense                                    33,000
                        Dividend revenue                                            27,000
                        Utilities expense                                               3,000
                        Extraordinary loss                                         30,000
                        Interest expense                                                6,000
a.     $32,400
b.     $20,400
c.     $21,600
d.     $  9,600


   90.       In 2012, Esther Corporation reported net income of $600,000. It declared and paid preferred stock dividends of $150,000 and common stock dividends of $60,000. During 2012, Esther had a weighted average of 200,000 common shares outstanding. Compute Esther's 2012 earnings per share.
a.     $1.95
b.     $2.25
c.     $3.00
d.     $3.75

   91.       In 2012, Linz Corporation reported an extraordinary loss of $1,000,000, net of tax. It declared and paid preferred stock dividends of $100,000 and common stock dividends of $300,000. During 2012, Linz had a weighted average of 400,000 common shares outstanding. Compute the effect of the extraordinary loss, net of tax, on earnings per share.
a.     $1.50
b.     $1.75
c.     $2.25
d.     $2.50

   92.       In 2012, Benfer Corporation reported net income of $280,000. It declared and paid common stock dividends of $32,000 and had a weighted average of 70,000 common shares outstanding. Compute the earnings per share to the nearest cent.
a.     $3.54
b.     $2.80
c.     $3.60
d.     $4.00

   93.       Benedict Corporation reports the following information:
Net income                                                                                                  $750,000
Dividends on common stock                                                                      210,000
Dividends on preferred stock                                                                       90,000
Weighted average common shares outstanding                                   100,000
Benedict should report earnings per share of
a.     $4.50.
b.     $5.40
c.     $6.60.
d.     $7.50.

   94.       Norling Corporation reports the following information:
Net income                                                                                                  $750,000
Dividends on common stock                                                                      210,000
Dividends on preferred stock                                                                       90,000
Weighted average common shares outstanding                                   200,000
Norling should report earnings per share of
a.     $2.25.
b.     $2.70
c.     $3.30.
d.     $3.75.

   95.       Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
      in prior years, net of tax                                                               $   645,000
Dividends declared                                                                                      480,000
Net income                                                                                                 1,500,000
Retained earnings, 1/1/12, as reported                                               3,000,000
Moorman should report retained earnings, 1/1/12, as adjusted at
a.     $2,355,000.
b.     $3,000,000.
c.     $3,645,000.
d.     $4,665,000.

   96.       Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
      in prior years, net of tax                                                               $   645,000
Dividends declared                                                                                      480,000
Net income                                                                                                 1,500,000
Retained earnings, 1/1/12, as reported                                               3,000,000
Moorman should report retained earnings, 12/31/12, as adjusted at
a.     $2,355,000.
b.     $3,375,000.
c.     $4,020,000.
d.     $4,665,000.

   97.       Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
        in prior years, net of tax                                                             $   215,000
Dividends declared                                                                                      160,000
Net income                                                                                                     500,000
Retained earnings, 1/1/12, as reported                                               2,000,000
Leonard should report retained earnings, 1/1/12, as adjusted at
a.     $1,785,000.
b.     $2,000,000.
c.     $2,215,000.
d.     $2,555,000.

   98.       Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
        in prior years, net of tax                                                             $   215,000
Dividends declared                                                                                      160,000
Net income                                                                                                     500,000
Retained earnings, 1/1/12, as reported                                               2,000,000
Leonard should report retained earnings, 12/31/12, at
a.     $1,785,000.
b.     $2,125,000.
c.     $2,340,000.
d.     $2,555,000.
   99.       The following information was extracted from the accounts of Essex Corporation at December 31, 2012:
                                                                                                                                  CR(DR)      
Total reported income since incorporation                                                      $3,400,000
Total cash dividends paid                                                                                     (1,600,000)
Unrealized holding loss                                                                                             (240,000)
Total stock dividends distributed                                                                            (400,000)
Prior period adjustment, recorded January 1, 2012                                             150,000
What should be the balance of retained earnings at December 31, 2012?
a.     $1,310,000.
b.     $1,400,000.
c.     $1,160,000.
d.     $1,550,000.

100.       Madsen Company reported the following information for 2012:
Sales revenue                                                                                                          $1,530,000
Cost of goods sold                                                                                                    1,050,000
Operating expenses                                                                                                     165,000
Unrealized holding gain on available-for-sale securities                                   120,000
Cash dividends received on the securities                                                                  6,000
For 2012, Madsen would report other comprehensive income of
a.     $411,000.
b.     $405,000.
c.     $126,000.
d.     $120,000.

101.        Korte Company reported the following information for 2012:
Sales revenue                                                                                                      $1,500,000
Cost of goods sold                                                                                                1,050,000
Operating expenses                                                                                                 165,000
Unrealized holding gain on available-for-sale securities                                 60,000
Cash dividends received on the securities                                                              6,000
For 2012, Korte would report comprehensive income of
a.     $351,000.
b.     $345,000.
c.     $291,000.
d.     $60,000.


102.        For the year ended December 31, 2012, Transformers Inc. reported the following:
Net income                                                                                                              $120,000
Preferred dividends declared                                                                                  20,000
Common dividend declared                                                                                        4,000
Unrealized holding loss, net of tax                                                                           2,000
Retained earnings                                                                                                    160,000
Common stock                                                                                                             80,000
Accumulated Other Comprehensive Income,
                      Beginning Balance                                                                                  10,000
What would Transformers report as its ending balance of Accumulated Other
Comprehensive Income?
a.     $12,000
b.     $10,000
c.     $8,000
d.     $2,000

103.        For the year ended December 31, 2012, Transformers Inc. reported the following:
Net income                                                                                                              $120,000
Preferred dividends declared                                                                                  20,000
Common dividend declared                                                                                        4,000
Unrealized holding loss, net of tax                                                                           2,000
Retained earnings, beginning balance                                                                160,000
Common stock                                                                                                             80,000
Accumulated Other Comprehensive Income,
                      Beginning Balance                                                                                  10,000
What would Transformers report as the ending balance of Retained Earnings?
a.     $278,000
b.     $266,000
c.     $256,000
d.     $254,000

104.        For the year ended December 31, 2012, Transformers Inc. reported the following:
Net income                                                                                                              $120,000
Preferred dividends declared                                                                                  20,000
Common dividend declared                                                                                        4,000
Unrealized holding loss, net of tax                                                                           2,000
Retained earnings, beginning balance                                                                160,000
Common stock                                                                                                             80,000
Accumulated Other Comprehensive Income,
    Beginning Balance                                                                                              10,000
What would Transformers report as total stockholders' equity?
a.     $344,000
b.     $336,000
c.     $256,000
d.     $240,000




MULTIPLE CHOICE—CPA Adapted

105.   Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012, included the following expense accounts:
Accounting and legal fees                                                                        $280,000
Advertising                                                                                                    240,000
Freight-out                                                                                                     150,000
Interest                                                                                                           120,000
Loss on sale of long-term investments                                                       60,000
Officers' salaries                                                                                         360,000
Rent for office space                                                                                    360,000
Sales salaries and commissions                                                              220,000
   One-half of the rented premises is occupied by the sales department.

                How much of the expenses listed above should be included in Perry's selling expenses for 2012?
a.    $460,000.
b.    $610,000.
c.     $640,000.
d.    $790,000.

106.   Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012, included the following expense accounts:
Accounting and legal fees                                                                        $280,000
Advertising                                                                                                    240,000
Freight-out                                                                                                     150,000
Interest                                                                                                           120,000
Loss on sale of long-term investments                                                       60,000
Officers' salaries                                                                                         360,000
Rent for office space                                                                                    360,000
Sales salaries and commissions                                                              220,000
   One-half of the rented premises is occupied by the sales department.

                How much of the expenses listed above should be included in Perry's general and administrative expenses for 2012?
a.     $820,000.
b.     $880,000.
c.     $940,000.
d.     $1,000,000.

107.        Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012 included the following expense and loss accounts:
Accounting and legal fees                                                                        $210,000
Advertising                                                                                                    270,000
Freight-out                                                                                                     120,000
Interest                                                                                                           105,000
Loss on sale of long-term investment                                                         45,000
Officers' salaries                                                                                         335,000
Rent for office space                                                                                    330,000
Sales salaries and commissions                                                              255,000
One-half of the rented premises is occupied by the sales department. Didde's total selling expenses for 2012 are
a.     $810,000.
b.     $690,000.
c.     $645,000.
d.     $555,000.

108.       The following items were among those that were reported on Dye Co.'s income statement for the year ended December 31, 2012:
Legal and audit fees                                                                                                  $390,000
Rent for office space                                                                                                    540,000
Interest on inventory floor plan                                                                                630,000
Loss on abandoned equipment used in operations                                              105,000
The office space is used equally by Dye's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Dye's multiple-step income statement?
a.     $660,000.
b.     $765,000.
c.     $930,000.
d.     $1,290,000.

109.    Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2012 included the following:
                                                                                                                                Debit              Credit 
Sales revenue                                                                                                                                      $280,000
Cost of goods sold                                                                                             $100,000
Administrative expenses                                                                                       50,000
Loss on disposal of equipment                                                                            18,000
Sales commission expense                                                                                   16,000
Interest revenue                                                                                                                                      10,000
Freight-out                                                                                                                  6,000
Loss due to earthquake damage                                                                          24,000
Bad debt expense                                                                                                6,000                         
        Totals                                                                                                           $220,000               $290,000

Other information:
Logan's income tax rate is 30%. Finished goods inventory:
January 1, 2012                                 $160,000
December 31, 2012                             140,000
On Logan's multiple-step income statement for 2012,

                Cost of goods manufactured is
a.     $126,000.
b.     $120,000.
c.     $86,000.
d.     $80,000.

110.   Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2012 included the following:
                                                                                                                                Debit              Credit 
Sales revenue                                                                                                                                      $280,000
Cost of good sold                                                                                               $100,000
Administrative expenses                                                                                       50,000
Loss on disposal of equipment                                                                            18,000
Sales commission expense                                                                                   16,000
Interest revenue                                                                                                                                      10,000
Freight-out                                                                                                                  6,000
Loss due to earthquake damage                                                                          24,000
Bad debt expense                                                                                                6,000                         
        Totals                                                                                                           $220,000               $290,000

                Other information:
                Logan's income tax rate is 30%. Finished goods inventory:
January 1, 2012                                 $160,000
December 31, 2012                             140,000
                On Logan's multiple-step income statement for 2012,

                Income before extraordinary item is
a.     $128,000.
b.     $94,000.
c.     $65,800.
d.     $49,000.


111.    Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2012 included the following:
                                                                                                                                Debit              Credit 
Sales                                                                                                                                                     $280,000
Cost of sales                                                                                                       $100,000
Administrative expenses                                                                                       50,000
Loss on sale of equipment                                                                                    18,000
Commissions to salespersons                                                                             16,000
Interest revenue                                                                                                                                      10,000
Freight-out                                                                                                                  6,000
Loss due to earthquake damage                                                                          24,000
Bad debt expense                                                                                                6,000                         
        Totals                                                                                                           $220,000               $290,000

                Other information:
                Logan's income tax rate is 30%. Finished goods inventory:
January 1, 2012                                 $160,000
December 31, 2012                             140,000
                On Logan's multiple-step income statement for 2012,

                Extraordinary loss is
a.     $16,800.
b.     $24,000.
c.     $29,400.
d.     $42,000.

112.       Chase Corp. had the following infrequent transactions during 2012:
A $225,000 gain from selling the only investment Chase has ever owned.
A $315,000 gain on the sale of equipment.
A $105,000 loss on the write-down of inventories.
In its 2012 income statement, what amount should Chase report as total infrequent net gains that are not considered extraordinary?
a.     $120,000.
b.     $210,000.
c.     $435,000.
d.     $540,000.

113.       James, Inc. incurred the following infrequent losses during 2012:
A $140,000 write-down of equipment leased to others.
A $80,000 adjustment of accruals on long-term contracts.
A $120,000 write-off of obsolete inventory.
In its 2012 income statement, what amount should James report as total infrequent losses that are not considered extraordinary?
a.     $340,000.
b.     $260,000.
c.     $220,000.
d.     $200,000.


114.       Which of the following should be reported as a prior period adjustment?
                         Change in Estimated Lives                          Change from Unaccepted
                            of Depreciable Assets                        Principle to Accepted Principle
                a.                          Yes                                                                  Yes
                b.                          No                                                                  Yes
                c.                          Yes                                                                   No
                d.                          No                                                                   No


EXERCISES

Ex. 4-115—Definitions.
Provide clear, concise answers for the following.
1.     What are revenues?
2.     What are expenses?
3.     What are gains?
4.     What are losses?
5.     What are the criteria (in addition to materiality) that must be met to classify an event or transaction as extraordinary?
6.     When does a discontinued operation occur?
7.     Indicate how earnings per share is computed.
8.     State the primary category of prior period adjustments and indicate how they are reported in the financial statements.


Ex. 4-116—Terminology.
In the space provided, write the word or phrase that is defined or indicated.

1.     Net income minus preferred dividends
        divided by the weighted average of shares
        outstanding.                                                                                 1.     ________________________________

2.     All changes in equity during a period except
        those resulting from investments by owners
        and distributions to owners.                                                    2.     ________________________________

3.     A correction of an error is reported as a                               3.     ________________________________

4.     An event or transaction which is unusual
        in nature and infrequent in occurrence.                                4.     ________________________________

5.     The income statement category for a
        disposal of a component of a business.                                5.     ________________________________

6.     Relating tax expense to specific items
        on the income statement.                                                          6.     ________________________________



Ex. 4-117—Income statement disclosures.
What is disclosed in an income statement? Be specific.



Ex. 4-118—Calculation of net income from the change in stockholders' equity.
Presented below is certain information pertaining to Edson Company.
                Assets, January 1                                                                                                               $250,000
                Assets, December 31                                                                                                            230,000
                Liabilities, January 1                                                                                                           150,000
                Common stock, December 31                                                                                               80,000
                Retained earnings, December 31                                                                                         31,000
                Common stock sold during the year                                                                                   10,000
                Dividends declared during the year                                                                                   13,000

Compute the net income for the year.


Ex. 4-119—Calculation of net income from the change in stockholders' equity.
Presented below are changes in the account balances of Wenn Company during the year, except for retained earnings.
                                                                              Increase                                                                                          Increase
                                                                            (Decrease)                                                                                         (Decrease)
Cash                                                                        $29,000                Accounts payable                                             $34,000
Accounts receivable (net)                                    (13,000)              Bonds payable                                                   (20,000)
Inventory                                                                  52,000                Common stock                                                     62,000
Plant assets (net)                                                    47,000                Paid-in capital                                                    16,000

The only entries in Retained Earnings were for net income and a dividend declaration of $12,000.

Compute the net income for the current year.




Ex. 4-120—Income statement classifications.
Indicate the major section or subsection of a multiple-step income statement in which each of the following items would usually appear:
        a.     Advertising
        b.     Depletion
        c.     Dividend revenue
        d.     Freight-in
        e.     Loss on disposal of a component of the business, net of tax
        f.      Income taxes on income
        g.     Major casualty loss, net of tax
        h.     Purchase discounts
        i.      Sales discounts
        j.      Officers' salaries
        k.     Freight-out
        l.      Interest income




Ex. 4-121—Income statement relationships.
Fill in the appropriate blanks for each of the independent situations below.
                                                                                                    Company A            Company B             Company C    
Sales revenue                                                                              (a)  $_______                   $343,400                   $540,000
Beginning inventory                                                                               52,600             (d)  _______                       90,000
Net purchases                                                                                       175,300                     255,600             (g)  _______
Ending inventory                                                                                     52,200                     108,000                       63,000
Cost of goods sold                                                                   (b)    _______             (e)  _______                     417,000
Gross profit                                                                                             75,300                     108,000             (h)  _______
Operating expenses                                                                 (c)    _______                       50,000                       48,000
Income before taxes                                                                                 6,000              (f)  _______              (i)  _______



Ex. 4-122—Multiple-step income statement.
Listed below in scrambled order are 13 income statement categories. Use the numerals 1 through 13 to indicate the order in which these categories should appear on a multiple-step income statement.
(       )         Discontinued operations.
(       )         Cost of goods sold.
(       )         Other revenues and gains.
(       )         Net income.
(       )         Income taxes.
(       )         Sales revenue.
(       )         Gross profit on sales.
(       )         Income from operations.
(       )         Income from continuing operations before income taxes.
(       )         Operating expenses.
(       )         Extraordinary item.
(       )         Income before extraordinary items.
(       )         Income from continuing operations.


Ex. 4-123—Classification of income statement and retained earnings statement items.
For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections:
a.     Ordinary or unusual (but not extraordinary) item on the income statement
b.     Discontinued operations
c.     Extraordinary item on the income statement
d.     Prior period adjustment

________       1.       The bad debt rate was increased from 1% to 2%, thus increasing bad debt expense.

________       2.       Obsolete inventory was written off. This was the first loss of this type in the company's history.

________       3.       An uninsured casualty loss was incurred by the company. This was the first loss of this type in the company's 50-year history.

________       4.       Recognition of income earned last year which was inadvertently omitted from last year's income statement.

________       5.       The company sold one of its warehouses at a loss.

________       6.       Settlement of litigation with federal government related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes.

________       7.       A loss incurred from expropriation (the company owned resources in South America which were taken over by a dictator unsympathetic to American business).

________       8.       The company neglected to record its depreciation in the previous year.

________       9.       Discontinuance of all production in the United States. The manufacturing operations were relocated in Mexico.

________    10.       Loss on sale of investments. The company last sold some of its investments two years ago.

________    11.       Loss on the disposal of a component of the business.



PROBLEMS

Pr. 4-124—Multiple-step income statement.
Presented below is information related to Farr Company.

Retained earnings, December 31, 2012                                                                                                                   $  650,000
Sales revenue                                                                                                                                                                   1,400,000
Selling and administrative expenses                                                                                                                             240,000
Hurricane loss (pre-tax) on plant (extraordinary item)                                                                                             270,000
Cash dividends declared on common stock                                                                                                                   33,600
Cost of goods sold                                                                                                                                                             830,000
Gain resulting from computation error on depreciation charge in 2011 (pre-tax)                                              520,000
Other revenue                                                                                                                                                                     120,000
Other expenses                                                                                                                                                                   100,000

Instructions
Prepare in good form a multiple-step income statement for the year 2013. Assume a 30% tax rate and that 80,000 shares of common stock were outstanding during the year.




Pr. 4-125—Income statement form.
Wilcox Corporation had income from continuing operations of $750,000 (after taxes) in 2012. In addition, the following information, which has not been considered, is as follows.

1.     In 2012, Wilcox experienced an uninsured earthquake loss in the amount of $240,000.

2.     A machine was sold for $140,000 cash during the year at a time when its book value was $110,000. (Depreciation has been properly recorded.) The company often sells machinery of this type.

3.     Wilcox decided to discontinue its stereo division in 2012. During the current year, the loss on the disposal of this component of the business was $150,000 less applicable taxes.

Instructions
Present in good form the income statement of Wilcox Corporation for 2012 starting with "income from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 shares of com-mon stock were outstanding during the year.


Pr. 4-126—Multiple-step income statement.
Shown below is an income statement for 2012 that was prepared by a poorly trained bookkeeper of Howell Corporation.

Howell Corporation
INCOME STATEMENT
December 31, 2012
                Sales revenue                                                                                                                                  $  915,000
                Investment revenue                                                                                                                                19,500
                Cost of merchandise sold                                                                                                                 (408,500)
                Selling expenses                                                                                                                                  (145,000)
                Administrative expenses                                                                                                                   (215,000)
                Interest expense                                                                                                                                  (13,000)
                Income before special items                                                                                                              153,000
                Special items
                        Loss on disposal of a component of the business                                                                 (30,000)
                        Major casualty loss (extraordinary item)                                                                               (60,000)
                Net federal income tax liability                                                                                                       (27,900)
                Net income                                                                                                                                         $  35,100

Instructions
Prepare a multiple-step income statement for 2012 for Howell Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology). Howell Corporation has 50,000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items. Round all earnings per share figures to the nearest cent.



Pr. 4-127—Single-step income statement.
Presented below is an income statement for Kinder Company for the year ended December 31, 2012.
Kinder Company
Income Statement
For the Year Ended December 31, 2012

Net sales                                                                                                                                                                            $800,000
Costs and expenses:
        Cost of goods sold                                                                                                                                                     560,000
        Selling, general, and administrative expenses                                                                                                       70,000
        Other, net                                                                                                                                                                   20,000
                Total costs and expenses                                                                                                                               650,000
Income before income taxes                                                                                                                                            150,000
Income taxes                                                                                                                                                                     45,000
Net income                                                                                                                                                                        $105,000

Additional information:
1.     "Selling, general, and administrative expenses" included a usual but infrequent charge of $7,000 due to a loss on the sale of investments.
2.     "Other, net" consisted of interest expense, $10,000, and an extraordinary loss of $10,000 before taxes due to earthquake damage. If the extraordinary loss had not occurred, income taxes for 2012 would have been $24,000 instead of $21,000.
4.     Kinder had 20,000 shares of common stock outstanding during 2012.

Instructions
Using the single-step format, prepare a corrected income statement, including the appropriate per share disclosures.


Pr. 4-128—Income statement and retained earnings statement.
Porter Corporation's capital structure consists of 50,000 shares of common stock. At December 31, 2012 an analysis of the accounts and discussions with company officials revealed the following information:

                Sales revenue                                                                                                                                          $1,100,000
                Purchase discounts                                                                                                                                       18,000
                Purchases                                                                                                                                                      692,000
                Earthquake loss (net of tax) (extraordinary item)                                                                                   35,000
                Selling expenses                                                                                                                                           128,000
                Cash                                                                                                                                                                  60,000
                Accounts receivable                                                                                                                                       90,000
                Common stock                                                                                                                                              200,000
                Accumulated depreciation-machinery                                                                                                    180,000
                Dividend revenue                                                                                                                                              8,000
                Inventory, January 1, 2012                                                                                                                         152,000
                Inventory, December 31, 2012                                                                                                                   125,000
                Unearned service revenue                                                                                                                               4,400
                Interest payable                                                                                                                                                1,000
                Land                                                                                                                                                                370,000
                Patents                                                                                                                                                           100,000
                Retained earnings, January 1, 2012                                                                                                         290,000
                Interest expense                                                                                                                                              17,000
                Administrative expenses                                                                                                                            170,000
                Dividends declared                                                                                                                                        24,000
                Allowance for doubtful accounts                                                                                                                  5,000
                Notes payable (maturity 7/1/15)                                                                                                              200,000
                Machinery                                                                                                                                                     450,000
                Materials                                                                                                                                                         40,000
                Accounts payable                                                                                                                                           60,000

The amount of income taxes applicable to ordinary income was $27,600, excluding the tax effect of the earthquake loss which amounted to $15,000.

Instructions
(a)   Prepare a multiple-step income statement.
(b)   Prepare a retained earnings statement.



Pr. 4-129—Irregular items and financial statements.
The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the seven items listed below during the fiscal year ending December 31, 2012. Assume a tax rate of 40 percent.
1.             The corporation experienced an uninsured flood loss of $70,000 before taxes. While this loss meets the criteria of an extraordinary item, it has not been recorded.
2.             The corporation disposed of its sporting goods division during 2012. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $12,000 before taxes on the disposal of the division. All of these events occurred in 2012 and have not been recorded.
3.             The company recorded advances of $10,000 to employees made December 31, 2012 as Salaries and wages Expense.
4.             Dividends of $10,000 during 2012 were recorded as an operating expense.
5.             In 2012, Bakersfield changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2012 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $115,000 of cost of goods sold (before taxes) being reported on prior years' income statement.
6.             Office equipment purchased January 1, 2012 for $45,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected salvage value. Bakersfield uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been recorded.
7.             On January 1, 2008, Bakersfield bought a building that cost $85,000, had an estimated useful life of ten years, and had a salvage value of $5,000. Bakersfield uses the
straight-line depreciation method to depreciate the building. In 2012, it was estimated that the remaining useful life was eight years and the salvage value was zero. Depreciation expense reported on the 2012 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made.
Part A. For each item, record corrections to income from continuing operations before taxes, if any. Denote any negative numbers by using brackets <  >.

Part B. At January 1, 2010, Bakersfield, Inc.'s retained earnings balance was $200,000. Assume that income from continuing operations (before taxes) and after correctly considering any of the seven additional items was $1,200,000. Prepare the income statement and retained earnings statement. Denote negative numbers by using brackets <  >. Do not disclose earnings per share data.