Financial Accounting 2th eidtion chapter 4 solution manual

Intermediate Accounting
IFRS Edition-2nd
Questions & Solutions
Chapter 4

Income Statement
and Related
Information

Donald E. Kieso
Jerry J. Weygandt
Terry D. Warfield


BRIEF EXERCISES
2

3

BE4-1 Starr Co. had sales revenue of £540,000 in 2015. Other items recorded during the year were:
Cost of goods sold
Selling expenses
Income tax
Increase in value of employees
Administrative expenses

£330,000
120,000
25,000
15,000
10,000

Prepare an income statement for Starr for 2015. Starr has 100,000 shares outstanding.
2

3

BE4-2 Brisky Corporation had net sales of $2,400,000 and interest revenue of $31,000 during 2015. Expenses for 2015 were cost of goods sold $1,450,000, administrative expenses $212,000, selling expenses
$280,000, and interest expense $45,000. Brisky’s tax rate is 30%. The corporation had 100,000 shares authorized and 70,000 shares issued and outstanding during 2015. Prepare an income statement for the year
ended December 31, 2015.

3

4

BE4-3 Presented below is some financial information related to Volaire Group, a service company.
Revenues
Income from continuing operations
Comprehensive income
Net income
Income from operations
Selling and administrative expenses
Income before income tax

€800,000
100,000
120,000
90,000
220,000
500,000
200,000

Compute the following: (a) other income and expense, (b) financing costs, (c) income tax, (d) discontinued
operations, and (e) other comprehensive income.
3

4

BE4-4 The following information is provided.
Sales revenue
Gain on sale of plant assets
Selling and administrative expenses

HK$100,000
30,000
10,000

Cost of goods sold
Interest expense
Income tax rate

HK$55,000
5,000
20%

Determine (a) income from operations, (b) income before income tax, and (c) net income.
3

4

BE4-5 The following information is provided about Caltex Company: income from operations $430,000,

loss on inventory write-downs $12,000, selling expenses $62,000, and interest expense $20,000. The tax rate
is 30%. Determine net income.

3

4

BE4-6 Indicate in what section (gross profit, income from operations, or income before income tax) the
following items are reported: (a) interest revenue, (b) interest expense, (c) loss on impairment of goodwill,
(d) sales revenue, and (e) administrative expenses.

3

4

BE4-7 Finley Corporation had income from continuing operations of £10,600,000 in 2015. During 2015, it
disposed of its restaurant division at an after-tax loss of £189,000. Prior to disposal, the division operated
at a loss of £315,000 (net of tax) in 2015. Finley had 10,000,000 shares outstanding during 2015. Prepare a
partial income statement for Finley beginning with income from continuing operations.

4

7

BE4-8 During 2015, Williamson Company changed from FIFO to weighted-average inventory pricing.
Pretax income in 2014 and 2013 (Williamson’s first year of operations) under FIFO was $160,000 and
$180,000, respectively. Pretax income using weighted-average pricing in the prior years would have been
$145,000 in 2014 and $170,000 in 2013. In 2015, Williamson Company reported pretax income (using
weighted-average pricing) of $180,000. Show comparative income statements for Williamson Company,
beginning with “Income before income tax,” as presented on the 2015 income statement. (The tax rate in all

years is 30%.)

4

7

BE4-9 Vandross Company has recorded bad debt expense in the past at a rate of 1½% of net sales. In 2015,
Vandross decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative
bad debt expense would have been €380,000 instead of €285,000. In 2015, bad debt expense will be €120,000
instead of €90,000. If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of
changing the estimated bad debt rate?

5

BE4-10 In 2015, Hollis Corporation reported net income of $1,000,000. It declared and paid preference
dividends of $250,000. During 2015, Hollis had a weighted average of 190,000 ordinary shares outstanding.
Compute Hollis’s 2015 earnings per share.


Exercises 165

7

8

BE4-11 Tsui Corporation has retained earnings of NT$675,000 at January 1, 2015. Net income during 2015
was NT$1,400,000, and cash dividends declared and paid during 2015 totaled NT$75,000. Prepare a retained earnings statement for the year ended December 31, 2015.

8

BE4-12 Using the information from BE4-11, prepare a retained earnings statement for the year ended
December 31, 2015. Assume an error was discovered: Land costing NT$80,000 (net of tax) was charged to
repairs expense in 2014.

9

BE4-13 On January 1, 2015, Otano Inc. had cash and share capital of ¥60,000,000. At that date, the company
had no other asset, liability, or equity balances. On January 2, 2015, it purchased for cash ¥20,000,000 of
equity securities that it classified as non-trading. It received cash dividends of ¥3,000,000 during the year
on these securities. In addition, it has an unrealized holding gain on these securities of ¥4,000,000 (net of
tax). Determine the following amounts for 2015: (a) net income, (b) comprehensive income, (c) other
comprehensive income, and (d) accumulated other comprehensive income (end of 2015).

EXERCISES
2

8
9

E4-1 (Compute Income Measures) Presented below is information related to Viel Company at
December 31, 2015, the end of its first year of operations.
Sales revenue
Cost of goods sold
Selling and administrative expenses
Gain on sale of plant assets
Unrealized gain on non-trading equity securities
Interest expense
Loss on discontinued operations
Allocation to non-controlling interest
Dividends declared and paid

€310,000
140,000
50,000
30,000
10,000
6,000
12,000
40,000
5,000

Instructions
Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Viel
Company controlling shareholders, (d) comprehensive income, and (e) retained earnings balance at
December 31, 2015.
2

E4-2 (Computation of Net Income) Presented below are changes in all account balances of Jackson Furniture Co. during the current year, except for retained earnings.
Increase
(Decrease)
Cash
Accounts Receivable (net)
Inventory
Investments

£ 69,000
45,000
127,000
(47,000)

Increase
(Decrease)
Accounts Payable
Bonds Payable
Share Capital—Ordinary

£ (51,000)
82,000
138,000

Instructions
Compute the net income for the current year, assuming that there were no entries in the Retained Earnings
account except for net income and a dividend declaration of £24,000 which was paid in the current year.
2

E4-3 (Income Statement Items) Presented below are certain account balances of Wade Products Co.
Rent revenue
Interest expense
Beginning retained earnings
Ending retained earnings
Dividend revenue
Sales returns and allowances

$

6,500
12,700
114,400
134,000
71,000

12,400

Sales discounts
Selling expenses
Sales revenue
Income tax expense
Cost of goods sold
Administrative expenses

$

7,800
99,400
400,000
26,600
184,400
82,500

Instructions
From the foregoing, compute the following: (a) total net revenue, (b) net income, and (c) dividends
declared during the current year.
2

3

E4-4 (Income Statement Presentation) The financial records of Dunbar Inc. were destroyed by fire at
the end of 2015. Fortunately, the controller had kept the following statistical data related to the income
statement.
1. The beginning merchandise inventory was $92,000 and decreased 20% during the current year.
2. Sales discounts amount to $17,000.

166 Chapter 4 Income Statement and Related Information
3. 30,000 ordinary shares were outstanding for the entire year.
4. Interest expense was $20,000.
5. The income tax rate is 30%.
6. Cost of goods sold amounts to $500,000.
7. Administrative expenses are 18% of cost of goods sold but only 8% of gross sales.
8. Four-fifths of the operating expenses relate to sales activities.
Instructions
From the foregoing information, prepare an income statement for the year 2015.
3

4

E4-5 (Income Statement) Presented below is information related to Webster Company (amounts in thousands).
Administrative expenses
Officers’ salaries
Depreciation of office furniture and equipment
Cost of goods sold
Rent revenue
Selling expenses
Delivery expense
Sales commissions
Depreciation of sales equipment
Sales revenue
Income tax
Interest expense

£ 4,900

3,960
63,570
17,230
2,690
7,980
6,480
96,500
7,580
1,860

Instructions
Prepare an income statement for the year 2015. Ordinary shares outstanding for 2015 total 40,550 (in thousands).
3

4

E4-6 (Income Statement Items) The following balances were taken from the books of Parnevik Corp. on
December 31, 2015.
Interest revenue
Cash
Sales revenue
Accounts receivable
Prepaid insurance
Sales returns and allowances
Allowance for doubtful accounts
Sales discounts
Land
Equipment
Buildings
Cost of goods sold

Accumulated depreciation—equipment

€

86,000
51,000
1,280,000
150,000
20,000
150,000
7,000
45,000
100,000
200,000
140,000
621,000
40,000

Accumulated depreciation—buildings
Notes receivable
Selling expenses
Accounts payable
Bonds payable
Administrative and general expenses
Accrued liabilities
Interest expense
Notes payable
Loss from impairment of plant assets
Share capital—ordinary
Retained earnings

€ 28,000
155,000
194,000
170,000
100,000
97,000
32,000
60,000
100,000
120,000
500,000
21,000

Assume the total effective tax rate on all items is 34%.
Instructions
Prepare an income statement; 100,000 ordinary shares were outstanding during the year.
3

4

E4-7 (Income Statement) The accountant of Weatherspoon Shoe Co. has compiled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2015.
Rent revenue
Interest expense
Unrealized gain on non-trading equity securities, net of tax
Selling expenses
Income tax
Administrative expenses
Cost of goods sold
Net sales

Cash dividends declared
Loss on sale of plant assets

£ 29,000
18,000
31,000
140,000
30,600
181,000
516,000
980,000
16,000
15,000

There were 20,000 ordinary shares outstanding during the year.
Instructions
(a) Prepare a comprehensive income statement using the combined statement approach.
(b) Prepare a comprehensive income statement using the two statement approach.
(c) Which format do you prefer? Discuss.


Exercises 167
2

3

4

5

6

E4-8 (Income Statement, EPS) Presented below are selected ledger accounts of McGraw Corporation as
of December 31, 2015.
Cash
Administrative expenses
Selling expenses
Net sales
Cost of goods sold
Cash dividends declared (2015)
Cash dividends paid (2015)
Discontinued operations (loss before income tax)
Depreciation expense, not recorded in 2014
Retained earnings, December 31, 2014
Effective tax rate 30%

€ 50,000
100,000
80,000
540,000
260,000
20,000
15,000
40,000
30,000
90,000

Instructions
(a) Compute net income for 2015.
(b) Prepare a partial income statement beginning with income before income tax, and including appropriate earnings per share information. Assume 20,000 ordinary shares were outstanding during 2015.

3

4

5

6

8

E4-9 (Income Statement with Retained Earnings) Presented below is information related to Tao Corp. for
the year 2015 (amounts in thousands).
Net sales
Cost of goods sold
Selling expenses
Administrative expenses
Dividend revenue
Interest revenue

HK$1,200,000
780,000
65,000
48,000
20,000
7,000

Write-off of inventory due to obsolescence
Depreciation expense omitted by accident in 2014
Interest expense
Cash dividends declared

Retained earnings at December 31, 2014
Effective tax rate of 34% on all items

HK$ 80,000
40,000
50,000
45,000
980,000

Instructions
(a) Prepare an income statement for 2015. Assume that 60,000 ordinary shares are outstanding.
(b) Prepare a retained earnings statement for 2015.
5

E4-10 (Earnings per Share) The equity section of Sosa Corporation appears below as of December 31, 2015.
Share capital—preference (6% preference shares, R$50 par value,
authorized 100,000 shares, outstanding 90,000 shares)
Share capital—ordinary (R$1 par, authorized and issued 10 million shares)
Share premium—ordinary
Retained earnings
Net income

R$

R$134,000,000
33,000,000

4,500,000
10,000,000
20,500,000

167,000,000

R$202,000,000

Net income for 2015 reflects a total effective tax rate of 20%. Included in the net income figure is a loss of
R$12,000,000 (before tax) as a result of discontinued operations. Preference dividends of R$270,000 were
declared and paid in 2015. Dividends of R$1,000,000 were declared and paid to ordinary shareholders in 2015.
Instructions
Compute earnings per share data as it should appear on the income statement of Sosa Corporation.
3

4

5
6

E4-11 (Condensed Income Statement—Periodic Inventory Method) Presented below are selected ledger
accounts of Woods Corporation at December 31, 2015.
Cash
$ 185,000
Inventory (beginning)
535,000
Sales revenue
4,175,000
Unearned sales revenue
117,000
Purchases
2,786,000
Sales discounts
34,000

Purchase discounts
27,000
Selling expenses
69,000
Accounting and legal services
33,000
Insurance expense (office)
24,000
Advertising expense
54,000
Delivery expense
93,000
Depreciation expense (office equipment)
48,000
Depreciation expense (sales equipment)
36,000

Salaries and wages expense (sales)
Salaries and wages expense (office)
Purchase returns
Sales returns and allowance
Freight-in
Accounts receivable
Sales commissions
Telephone and Internet expense (sales)
Utilities expense (office)
Miscellaneous office expenses
Rent revenue
Loss on sale of division
Interest expense

Share capital—ordinary ($10 par)

$284,000
346,000
15,000
79,000
72,000
142,500
83,000
17,000
32,000
8,000
240,000
60,000
176,000
900,000

Woods’s effective tax rate on all items is 30%. A physical inventory indicates that the ending inventory is $686,000.


168 Chapter 4 Income Statement and Related Information
Instructions
Prepare a 2015 income statement for Woods Corporation.
8

E4-12 (Retained Earnings Statement) McEntire Corporation began operations on January 1, 2012. During
its first 3 years of operations, McEntire reported net income and declared dividends as follows.
Net income
2012
2013

2014

Dividends declared

$ 40,000
125,000
160,000

$ –0–
50,000
50,000

The following information relates to 2015.
Income before income tax
Prior period adjustment: understatement of 2013 depreciation expense (before taxes)
Cumulative decrease in income from change in inventory methods (before taxes)
Dividends declared (of this amount, $25,000 will be paid on Jan. 15, 2016)
Effective tax rate

$220,000
$ 25,000
$ 45,000
$100,000
20%

Instructions
(a) Prepare a 2015 retained earnings statement for McEntire Corporation.
(b) Assume McEntire Corp. restricted retained earnings in the amount of $70,000 on December 31,
2015. After this action, what would McEntire report as total retained earnings in its December 31,
2015, statement of financial position?

4

5
6

E4-13 (Earnings per Share) At December 31, 2014, Schroeder Corporation had the following shares
outstanding.
8% cumulative preference shares, €100 par, 107,500 shares
Ordinary shares, €5 par, 4,000,000 shares

€10,750,000
20,000,000

During 2015, Schroeder did not issue any additional shares. The following also occurred during 2015.
Income before income tax
Discontinued operations (loss before taxes)
Preference dividends declared
Ordinary dividends declared
Effective tax rate

€21,650,000
3,225,000
860,000
2,200,000
35%

Instructions
Compute earnings per share data as it should appear in the 2015 income statement of Schroeder Corporation. (Round to two decimal places.)
6

7

E4-14 (Change in Accounting Principle) Zehms Company began operations in 2013 and adopted
weighted-average pricing for inventory. In 2015, in accordance with other companies in its industry, Zehms
changed its inventory pricing to FIFO. The pretax income data is reported below.
Year

Weighted-Average

FIFO

2013
2014
2015

$370,000
390,000
410,000

$395,000
420,000
460,000

Instructions
(a) What is Zehms’s net income in 2015? Assume a 35% tax rate in all years.
(b) Compute the cumulative effect of the change in accounting principle from weighted-average to
FIFO inventory pricing.
(c) Show comparative income statements for Zehms Company, beginning with income before income
tax, as presented on the 2015 income statement.
4

9

E4-15 (Comprehensive Income) Gaertner Corporation reported the following for 2015: net sales
€1,200,000, cost of goods sold €720,000, selling and administrative expenses €320,000, and an unrealized
holding gain on non-trading equity securities €15,000.
Instructions
Prepare a statement of comprehensive income, using the two statement format. Ignore income taxes and
earnings per share.

8

9

E4-16 (Comprehensive Income) Bryant Co. reports the following information for 2015: sales revenue
£750,000, cost of goods sold £500,000, operating expenses £80,000, and an unrealized holding loss on nontrading equity securities for 2015 of £50,000. It declared and paid a cash dividend of £10,000 in 2015.


Problems 169
Bryant Co. has January 1, 2015, balances in share capital—ordinary £350,000, accumulated other comprehensive income related to the unrealized holding gain of £80,000, and retained earnings £90,000. It
issued no ordinary shares during 2015. Ignore income taxes.
Instructions
Prepare a statement of changes in equity.
3

4

5

6

8

9

E4-17 (Various Reporting Formats) The following information was taken from the records of Vega Inc.
for the year 2015: income tax applicable to income from continuing operations R$119,000, income tax applicable to loss on discontinued operations R$25,500, and unrealized holding gain on non-trading equity
securities R$15,000.
Gain on sale of plant assets
Loss on discontinued operations
Administrative expenses
Rent revenue
Loss on impairment of land

R$ 95,000
75,000
240,000
40,000
60,000

Cash dividends declared
Retained earnings January 1, 2015
Cost of goods sold
Selling expenses
Sales revenue

R$ 150,000
600,000
850,000
300,000

1,700,000

Ordinary shares outstanding during 2015 were 100,000.
Instructions
(a) Prepare a comprehensive income statement for 2015 using the one statement approach.
(b) Prepare a retained earnings statement for 2015.
9

E4-18 (Changes in Equity) The equity section of Hasbro Inc. at January 1, 2015, was as follows.
Share capital—ordinary
Accumulated other comprehensive income
Unrealized holding gain on non-trading equity securities
Retained earnings

$300,000
50,000
20,000

During the year, the company had the following transactions.
1. Issued 10,000 shares at $3 per share.
2. Dividends of $9,000 were declared and paid.
3. Net income for the year was $100,000.
4. Unrealized holding loss of $5,000 occurred on its non-trading equity securities.
Instructions
Prepare a statement of changes in equity for Hasbro Inc.

PROBLEMS
4

8

9

P4-1 (Income Components) Presented below are financial statement classifications for the statement of
comprehensive income and the retained earnings statement. For each transaction or account title, enter in
the space provided a letter(s) to indicate the usual classification.
Statement of Comprehensive Income
A
B
C
D
E

Revenue
Operating expense
Other income or expense
Discontinued operations
Other comprehensive income

Retained Earnings Statement
F
G
H
I

An addition or deduction from beginning balance
Additions to retained earnings
Deduction from retained earnings
Note classification

Transactions

1. ______ Unrealized holding loss on non-trading equity securities.
2. ______ Gain on sale of non-trading equity securities.
3. ______ Sales revenue.
4. ______ Loss on impairment of goodwill.
5. ______ Sales salaries accrued.
6. ______ Net income for the period.
7. ______ Loss on sale of investments.
8. ______ Depreciation on equipment used in operations.
9. ______ Cash dividends declared and paid.
10. ______ Correction of an error due to expensing the cost of equipment in a previous year.
11. ______ Insurance gain on flood loss—insurance proceeds exceed the carrying amount of assets destroyed.
12. ______ The company has decided to stop production of its candy division and suffered a loss on the sale of this division.


170 Chapter 4 Income Statement and Related Information
3

4

5

6

8

P4-2 (Income Statement, Retained Earnings) Presented below is information related to Dickinson Company
for 2015.
Retained earnings balance, January 1, 2015
Sales revenue
Cost of goods sold

Interest expense
Selling and administrative expenses
Write-off of goodwill
Income taxes for 2015
Gain on the sale of investments
Loss due to flood damage
Loss on the disposition of the wholesale division (net of tax)
Loss on operations of the wholesale division (net of tax)
Dividends declared on ordinary shares
Dividends declared on preference shares

€ 980,000
25,000,000
16,000,000
70,000
4,700,000
820,000
1,244,000
110,000
390,000
440,000
90,000
250,000
80,000

Instructions
Prepare an income statement and a retained earnings statement. Dickinson Company decided to discontinue
its entire wholesale operations and to retain its manufacturing operations. On September 15, Dickinson sold
the wholesale operations to Rogers Company. During 2015, there were 500,000 ordinary shares outstanding
all year.

2

3

4

6

8

P4-3 (Income Statement, Retained Earnings, Periodic Inventory) Presented below is the trial balance
of Thompson Corporation at December 31, 2015.

THOMPSON CORPORATION
TRIAL BALANCE
DECEMBER 31, 2015
Debit
Purchase Discounts
Cash
Accounts Receivable
Rent Revenue
Retained Earnings
Salaries and Wages Payable
Sales Revenue
Notes Receivable
Accounts Payable
Accumulated Depreciation—Equipment
Sales Discounts
Sales Returns and Allowances
Notes Payable

Selling Expenses
Administrative Expenses
Share Capital—Ordinary
Income Tax Expense
Cash Dividends
Allowance for Doubtful Accounts
Supplies
Freight-In
Land
Equipment
Bonds Payable
Gain on Sale of Land
Accumulated Depreciation—Buildings
Inventory
Buildings
Purchases
Totals

Credit
£

10,000

£ 189,700
105,000
18,000
160,000
18,000
1,100,000
110,000

49,000
28,000
14,500
17,500
70,000
232,000
99,000
300,000
53,900
45,000
5,000
14,000
20,000
70,000
140,000
100,000
30,000
19,600
89,000
98,000
610,000
£1,907,600

£1,907,600

A physical count of inventory on December 31 resulted in an inventory amount of £64,000; thus, cost of
goods sold for 2015 is £645,000.


Problems 171

Instructions
Prepare an income statement and a retained earnings statement. Assume that the only changes in retained
earnings during the current year were from net income and dividends. Thirty thousand ordinary shares
were outstanding the entire year.
3

4

5

6

7

P4-4 (Income Statement Items) Maher Inc. reported income before income tax during 2015 of €790,000.
Additional transactions occurring in 2015 but not considered in the €790,000 are as follows.
1. The corporation experienced an uninsured flood loss in the amount of €90,000 during the year.
2. At the beginning of 2013, the corporation purchased a machine for €54,000 (residual value of €9,000) that
had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2013, 2014, and 2015 but
failed to deduct the residual value in computing the depreciation base.
3. Sale of securities held as a part of its portfolio resulted in a gain of €47,000.
4. The corporation disposed of its recreational division at a loss of €115,000 before taxes. Assume that this
transaction meets the criteria for discontinued operations.
5. The corporation decided to change its method of inventory pricing from average-cost to the FIFO
method. The effect of this change on prior years is to increase 2013 income by €60,000 and decrease
2014 income by €20,000 before taxes. The FIFO method has been used for 2015.
Instructions
Prepare an income statement for the year 2015, starting with income before income tax. Compute earnings
per share as it should be shown on the face of the income statement. Ordinary shares outstanding for the
year are 120,000 shares. (Assume a tax rate of 30% on all items.)

3

4

5

6

8

P4-5 (Income Statement, Retained Earnings) The following account balances were included in the trial
balance of Twain Corporation at June 30, 2015.
Sales revenue
Sales discounts
Cost of goods sold
Salaries and wages expense (sales)
Sales commissions
Travel expense (salespersons)
Delivery expense
Entertainment expense
Telephone and Internet expense
(sales)
Depreciation expense (sales
equipment)
Maintenance and repairs expense (sales)
Miscellaneous selling expenses
Supplies expense
Telephone and Internet expense
(administration)

$1,578,500
31,150
896,770
56,260
97,600
28,930
21,400
14,820
9,030
4,980
6,200
4,715
3,450
2,820

Depreciation expense (office furniture
and equipment)
Property tax expense
Bad debt expense (selling)
Maintenance and repairs expense
(administration)
Office expenses
Sales returns and allowances
Dividend revenue
Interest expense
Income tax expense
Depreciation understatement
due to error—2013
Dividends declared on

preference shares
Dividends declared on
ordinary shares

$ 7,250
7,320
4,850
9,130
6,000
62,300
38,000
18,000
102,000
17,700
9,000
37,000

The Retained Earnings account had a balance of $337,000 at July 1, 2014. There are 80,000 ordinary
shares outstanding.
Instructions
Prepare an income statement and a retained earnings statement for the year ended June 30, 2015.
4

5

6
8

P4-6 (Statement Presentation) Presented below is a combined income and retained earnings statement
for Sapporo Company for 2015 (amounts in thousands).

Net sales
Costs and expenses
Cost of goods sold
Selling, general, and administrative expenses
Other, net

¥640,000
¥500,000
66,000
17,000

Income before income tax
Income tax
Net income
Retained earnings at beginning of period, as previously reported
Adjustment required for correction of error
Retained earnings at beginning of period, as restated
Dividends on ordinary shares
Retained earnings at end of period

583,000
57,000
19,400
37,600

141,000
(7,000)
134,000
(12,200)
¥159,400

172 Chapter 4 Income Statement and Related Information
Additional facts are as follows.
1. “Selling, general, and administrative expenses” for 2015 included a charge of ¥8,500,000 for impairment of intangibles.
2. “Other, net” for 2015 was a loss on sale of equipment of ¥17,000,000.
3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life
of certain assets reduced to 8 years and a catch-up adjustment made).
4. Sapporo Company disclosed earnings per share for net income in the notes to the financial statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the Sapporo Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the
appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
4

7
8

P4-7 (Retained Earnings Statement, Prior Period Adjustment) The following is the retained earnings
account for the year 2015 for Acadian Corp.
Retained earnings, January 1, 2015
Add:
Gain on sale of investments
Net income
Refund on litigation with government
Recognition of income earned in 2014, but omitted from income
statement in that year

$257,600
$41,200
84,500

21,600
25,400

172,700
430,300

Deduct:
Loss on discontinued operations
Write-off of goodwill
Cumulative effect on income of prior years in changing from
average-cost to FIFO inventory valuation in 2015
Cash dividends declared

35,000
60,000
23,200
32,000

Retained earnings, December 31, 2015

150,200
$280,100

Instructions
(a) Prepare a corrected retained earnings statement. (Ignore income tax effects.) FIFO inventory was
used in 2015 to compute net income.
(b) State where the items that do not appear in the corrected retained earnings statement should be shown.
4

5

6

P4-8 (Income Statement) Wade Corp. has 150,000 ordinary shares of outstanding. In 2015, the company reports
income before income tax of €1,210,000. Additional transactions not considered in the €1,210,000 are as follows.
1. In 2015, Wade Corp. sold equipment for €40,000. The machine had originally cost €80,000 and had
accumulated depreciation of €30,000.
2. The company discontinued operations of one of its subsidiaries during the current year at a loss of
€190,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The
loss from operations of the discontinued subsidiary was €90,000 before taxes; the loss from disposal of
the subsidiary was €100,000 before taxes.
3. An internal audit discovered that amortization of intangible assets was understated by €35,000
(net of tax) in a prior period. The amount was charged against retained earnings.
4. The company had a gain of €125,000 on the condemnation of much of its property.
Instructions
Analyze the above information and prepare an income statement for the year 2015, starting with income
before income tax. Compute earnings per share as it should be shown on the face of the income statement.
(Assume a total effective tax rate of 20% on all items.)

C O N C E P T S F O R A N A LY S I S
CA4-1 (Identification of Income Statement Deficiencies) O’Malley Corporation was incorporated and
began business on January 1, 2015. It has been successful and now requires a bank loan for additional
working capital to finance expansion. The bank has requested an audited income statement for the year
2015. The accountant for O’Malley Corporation provides you with the following income statement, which
O’Malley plans to submit to the bank.


Concepts for Analysis 173
O’MALLEY CORPORATION
INCOME STATEMENT
Sales revenue

Dividends
Gain on recovery of insurance proceeds from earthquake loss

£850,000
32,300
38,500
920,800

Less:
Selling expenses
Cost of goods sold
Interest expense
Loss on obsolescence of inventories
Loss on discontinued operations
Administrative expenses
Income before income tax
Income tax
Net income

£101,100
510,000
13,700
34,000
48,600
73,400

780,800
140,000
56,000
£ 84,000

Instructions
Indicate the deficiencies in the income statement presented.
CA4-2 (Earnings Management) Bobek Inc. has recently reported steadily increasing income. The company reported income of €20,000 in 2012, €25,000 in 2013, and €30,000 in 2014. A number of market analysts
have recommended that investors buy Bobek shares because the analysts expect the steady growth in
income to continue. Bobek is approaching the end of its fiscal year in 2015, and it again appears to be a
good year. However, it has not yet recorded warranty expense.
Based on prior experience, this year’s warranty expense should be around €5,000, but some managers
have approached the controller to suggest a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is €43,000. Specifically, by recording a €7,000 warranty
accrual this year, Bobek could report an increase in income for this year and still be in a position to cover
its warranty costs in future years.
Instructions
(a) What is earnings management?
(b) Assume income before warranty expense is €43,000 for both 2015 and 2016 and that total warranty
expense over the 2-year period is €10,000. What is the effect of the proposed accounting in 2015?
In 2016?
(c) What is the appropriate accounting in this situation?
CA4-3 (Earnings Management) Charlie Brown, controller for Kelly Corporation, is preparing the
company’s income statement at year-end. He notes that the company lost a considerable sum on the sale
of some equipment it had decided to replace. Brown does not want to highlight it as a material loss since
he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more
depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among
the company’s operating expenses, he wants to report the losses along with the company’s expenses, where
he hopes it will not be noticed.
Instructions
(a) What are the ethical issues involved?
(b) What should Brown do?
CA4-4 (Income Reporting Items) Simpson Corp. is an entertainment firm that derives approximately
30% of its income from the Casino Knights Division, which manages gambling facilities. As auditor for
Simpson Corp., you have recently overheard the following discussion between the controller and financial

vice president.
Vice President:

If we sell the Casino Knights Division, it seems ridiculous to segregate the results
of the sale in the income statement. Separate categories tend to be absurd and
confusing to the shareholders. I believe that we should simply report the gain
on the sale as other income or expense without detail.


174 Chapter 4 Income Statement and Related Information
Controller:

IFRS would require that we disclose this information more fully in the income
statement as a gain on discontinued operations.

Vice President:

What about the walkout we had last month when employees were upset about
their commission income? We had a loss as a result of this walkout.

Controller:

I am not sure where this item would be reported.

Vice President:

Oh well, it doesn’t make any difference because the net effect of all these items
is immaterial, so no disclosure is necessary.

Instructions

(a) On the basis of the foregoing discussion, answer the following questions: Who is correct about
handling the sale? What would be the correct income statement presentation for the sale of the
Casino Knights Division?
(b) How should the walkout by the employees be reported?
(c) What do you think about the vice president’s observation on materiality?
(d) What are the earnings per share implications of these topics?
CA4-5 (Identification of Income Statement Weaknesses) The following financial statement was prepared by employees of Walters Corporation.

WALTERS CORPORATION
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 2015
Revenues
Gross sales, including sales taxes
Less: Returns, allowances, and cash discounts
Net sales
Dividends, interest, and purchase discounts
Recoveries of accounts written off in prior years
Total revenues
Costs and expenses
Cost of goods sold, including sales taxes
Salaries and related payroll expenses
Rent
Delivery expense and freight-in
Bad debt expense
Total costs and expenses
Income before unusual items
Unusual items
Loss on discontinued styles (Note 1)
Loss on sale of marketable securities (Note 2)
Loss on sale of warehouse (Note 3)

Total unusual items
Net income
Net income per ordinary share

£1,044,300
56,200
988,100
30,250
13,850
1,032,200
465,900
60,500
19,100
3,400
27,800
576,700
455,500
71,500
39,050
86,350
196,900
£ 258,600
£2.30

Note 1: New styles and rapidly changing consumer preferences resulted in a £71,500 loss on the disposal of
discontinued styles and related accessories.
Note 2: The corporation sold an investment in marketable securities at a loss of £39,050. The corporation normally
sells securities of this nature.
Note 3: The corporation sold one of its warehouses at an £86,350 loss.

Instructions
Identify and discuss the weaknesses in classification and disclosure in the income statement above. You
should explain why these treatments are weaknesses and what the proper presentation of the items would
be in accordance with IFRS.


Using Your Judgment 175
CA4-6 (Classification of Income Statement Items) As audit partner for Grupo and Rijo, you are in charge
of reviewing the classification of unusual items that have occurred during the current year. The following
material items have come to your attention.
1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all
other periods is correctly computed.
2. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased for
$21,000 10 years ago. The Invicta is the only such display item the dealer owns.
3. A drilling company during the current year extended the estimated useful life of certain drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered.
4. A retail outlet changed its computation for bad debt expense from 1% to 1⁄2 of 1% of sales because of
changes in its customer clientele.
5. A mining concern sells a foreign subsidiary engaged in uranium mining. It is the only uranium mine
the company has.
6. A steel company changes from the average-cost method to the FIFO method for inventory costing
purposes.
7. A construction company, at great expense, prepared a major proposal for a government loan. The loan
is not approved.
8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the
year.
9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in
the current year.
10. A large sheep rancher suffered a major loss because the state required that all sheep in the state
be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for
20 years.

11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes
of customers.
Instructions
From the foregoing information, indicate in what section of the income statement or retained earnings
statement these items should be classified. Provide a brief rationale for your position.
CA4-7 (Comprehensive Income) Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the
company’s financial statements at year-end. Currently, he is focusing on the income statement and determining the format for reporting comprehensive income. During the year, the company earned net income
of $400,000 and had unrealized gains on non-trading equity securities of $15,000. In the previous year, net
income was $410,000, and the company had no unrealized gains or losses.
Instructions
(a) Show how income and comprehensive income will be reported on a comparative basis for the
current and prior years, using the separate income statement format.
(b) Show how income and comprehensive income will be reported on a comparative basis for the
current and prior years, using the combined comprehensive income statement format.
(c) Which format should Nelson recommend?



SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
STARR CO.
Income Statement
For the Year 2015
Sales Revenue..............................................................

£540,000

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

330,000

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

210,000

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

£120,000

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

10,000

130,000

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

80,000

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

25,000

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

£ 55,000

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

£0.55*

*£55,000 ÷ 100,000 shares.

Note: The increase in value of employees is not reported.

4-10

Copyright © 2014 John Wiley & Sons, Inc.

Kieso, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)


BRIEF EXERCISE 4-2
BRISKY CORPORATION
Income Statement
For the Year Ended December 31, 2015
Net sales .................................................................

$2,400,000

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

1,450,000

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

950,000

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

$280,000

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

212,000

492,000

Other income and expense
Interest revenue .....................................................

31,000

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

489,000

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

45,000

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

444,000

Income tax ($444,000 X 30%) ..........................

133,200

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

$ 310,800

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

$4.44*

*$310,800 ÷ 70,000 shares.
BRIEF EXERCISE 4-3
(a)

Other income and expense = €800,000 – €500,000 – €220,000 = €80,000

(b)

Financing costs = €220,000 – €200,000 = €20,000

(c)

Income tax = €200,000 – €100,000 = €100,000

(d)

Discontinued operations = €100,000 – €90,000 = (€10,000)

(e)

Other comprehensive income = €120,000 – €90,000 = €30,000

Copyright © 2014 John Wiley & Sons, Inc.

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(For Instructor Use Only)

4-11


BRIEF EXERCISE 4-4
1.

Income from operations = HK$100,000 – HK$55,000 – HK$10,000 +
HK$30,000 = HK$65,000

2.

Income before income tax = HK$65,000 – HK$5,000 = HK$60,000

3.

Net income = HK$60,000 – (HK$60,000 X 20%) = HK$48,000

BRIEF EXERCISE 4-5
Income before income tax = $430,000 – $20,000 = $410,000
Net income = $410,000 – ($410,000 X 30%) = $287,000
BRIEF EXERCISE 4-6
1.
2.

3.
4.
5.

Income from operations
Income before income tax
Income from operations
Gross profit
Income from operations

BRIEF EXERCISE 4-7
Income from continuing operations ..........................

£10,600,000

Discontinued operations
Loss from operation of discontinued
restaurant division (net of tax) ..................... £315,000
Loss from disposal of restaurant division
(net of tax) ......................................................

189,000

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

(504,000)
£10,096,000

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

£1.06

Discontinued operations, net of tax.................

(0.05)*

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

£1.01

*Rounded
4-12

Copyright © 2014 John Wiley & Sons, Inc.

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BRIEF EXERCISE 4-8

Income before income tax
Income tax (30%)
Net income

2015

2014

2013

$180,000

$145,000

$170,000

54,000

43,500

51,000

$126,000

$101,500

$119,000

BRIEF EXERCISE 4-9
Vandross would not report any cumulative effect because a change in estimate
is not handled retrospectively. Vandross would report bad debt expense of
€120,000 in 2015.

BRIEF EXERCISE 4-10
$1,000,000 – $250,000

= $3.95 per share

190,000

BRIEF EXERCISE 4-11
TSUI CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2015
Retained earnings, January 1...........................................

NT$ 675,000

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

1,400,000
2,075,000

Less: Cash dividends.......................................................

75,000

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

NT$2,000,000

Copyright © 2014 John Wiley & Sons, Inc.

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(For Instructor Use Only)

4-13


BRIEF EXERCISE 4-12
TSUI CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2015
Retained earnings, January 1, as reported ....................

NT$ 675,000

Correction for overstatement of expenses in
prior period (net of tax) ..........................................

80,000

Retained earnings, January 1, as adjusted ....................

755,000

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

1,400,000
2,155,000

Less: Cash dividends ......................................................

75,000

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

NT$2,080,000

BRIEF EXERCISE 4-13
(a)

Net income (Dividend revenue) .............................

¥3,000,000

(b)

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

¥3,000,000

Unrealized holding gain (net of tax) ......................

4,000,000

Comprehensive income .........................................

¥7,000,000

Unrealized holding gain
(Other comprehensive income) .............................

¥4,000,000

Accumulated other comprehensive income,

January 1, 2015 ...................................................

¥

(c)

(d)

4-14

0

Unrealized holding gain .........................................

4,000,000

Accumulated other comprehensive income,
December 31, 2015 .............................................

¥4,000,000

Copyright © 2014 John Wiley & Sons, Inc.

Kieso, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)


SOLUTIONS TO EXERCISES
EXERCISE 4-1 (10–15 minutes)

Sales revenue ..........................................................................
Cost of goods sold ..................................................................
Gross profit ..............................................................................
Selling and administrative expenses.....................................
Other income and expense
Gain on sale of plant assets ..........................................
Income from operations..........................................................
Interest expense ......................................................................
Income from continuing operations ......................................
Loss on discontinued operations ..........................................
Net income ...............................................................................
Allocation to non-controlling interest ...................................
Net income attributable to controlling shareholders ...........

€310,000
140,000
170,000
50,000
30,000
150,000(a)
6,000
144,000
(12,000)
132,000(b)
(40,000)
€ 92,000(c)

Net income ...............................................................................
Unrealized gain on non-trading equity securities ................
Comprehensive income ..........................................................

€132,000
10,000
€142,000(d)

Net income ...............................................................................
Dividends declared and paid ..................................................
Retained earnings December 31, 2015 ..................................

€132,000
(5,000)
€127,000(e)

EXERCISE 4-2 (15–20 minutes)
Computation of net income
Change in assets:
Change in liabilities:
Change in equity:

Copyright © 2014 John Wiley & Sons, Inc.

£69,000 + £45,000 + £127,000 – £47,000 = £194,000 Increase
£ 82,000 – £51,000 =

31,000 Increase
£163,000 Increase

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4-15


EXERCISE 4-2 (Continued)
Change in equity accounted
for as follows:
Net increase ..........................................................
Increase in shares .......................................
Decrease in retained earnings due to
dividend declaration................................
Net increase accounted for..................................
Increase in retained earnings due to net
income ...............................................................

£163,000
£138,000
(24,000)
114,000
£ 49,000

EXERCISE 4-3 (25–35 minutes)
(a) Total net revenue:
Sales revenue ...............................

$400,000

Less: Sales discounts.................

$ 7,800

Sales returns .....................

12,400

20,200

Net sales........................................

379,800

Dividend revenue .........................

71,000

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

6,500

Total net revenue ................

$457,300

(b) Net income:
Total net revenue (from a) ...........

$457,300

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

Selling expenses ...................
Administrative expenses ......
Interest expense ....................
Total expenses ................

4-16

$184,400
99,400
82,500
12,700
379,000

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

78,300

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

26,600

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

$ 51,700

Copyright © 2014 John Wiley & Sons, Inc.

Kieso, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 4-3 (Continued)
(c) Dividends declared:
Ending retained earnings ............
Beginning retained earnings ......
Net increase ...........................................
Less: Net income (from (b)) ................
Dividends declared ...............................

$134,000
(114,400)
19,600
51,700
$ 32,100

ALTERNATE SOLUTION (for (c))
Beginning retained earnings...............................
Add: Net income .................................................
Less: Dividends declared ...................................
Ending retained earnings ....................................

$114,400
51,700
166,100
?
$134,000

Dividends declared must be $32,100
($166,100 – $134,000)

EXERCISE 4-4 (20–25 minutes)
DUNBAR INC.
Income Statement
For Year Ended December 31, 2015
Net sales ($1,125,000(b) – $17,000) ............................
$1,108,000
Cost of goods sold .....................................................
500,000
Gross profit .................................................................
608,000
(c)
Selling expenses ........................................................ $360,000
Administrative expenses ...........................................
90,000(a)
450,000
Income from operations.............................................
158,000
Interest expense .........................................................
20,000
Income before income tax .........................................
138,000
Income tax ...................................................................
41,400
Net income ..................................................................
$ 96,600
Earnings per share (d) ...............................................
$3.22*
*Rounded
Copyright © 2014 John Wiley & Sons, Inc.

Kieso, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

4-17


EXERCISE 4-4 (Continued)
Determination of amounts
(a)

Administrative expenses

= 18% of cost of good sold
= 18% of $500,000
= $90,000

(b)

Gross sales X 8%

= administrative expenses
= $90,000 ÷ 8%

(c)

Gross sales

= $1,125,000

Selling expenses

= four times administrative expenses.
(since selling expenses are 4/5
of selling and administrative
expenses, selling expenses are
4 times administrative expenses.)
= 4 X $90,000
= $360,000

(d)

4-18

Earnings per share $3.22 ($96,600 ÷ 30,000)

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Kieso, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)


EXERCISE 4-5 (20–25 minutes)
WEBSTER COMPANY
Income Statement
For the Year Ended December 31, 2015
(In thousands, except earnings per share)
Sales revenue .....................................................

Cost of goods sold .............................................
Gross profit .........................................................
Selling expenses
Sales commissions ................................
Depr. of sales equipment .......................
Delivery expense ....................................
Administrative expenses
Officers’ salaries.....................................
Depr. of office furn. and equip. .............
Other income and expense
Rent revenue .............................................
Income from operations.....................................
Interest expense ...........................................
Income before income tax .................................
Income tax ...........................................................
Net income ..........................................................

£96,500
63,570
32,930
£7,980
6,480
2,690

£17,150

4,900
3,960

8,860

17,230
24,150
1,860
22,290
7,580
£14,710

Earnings per ordinary share
(£14,710 ÷ 40,550) .......................................

Copyright © 2014 John Wiley & Sons, Inc.

Kieso, IFRS, 2/e, Solutions Manual

26,010

£.36

(For Instructor Use Only)

4-19


EXERCISE 4-6 (30–35 minutes)
PARNEVIK CORP.
Income Statement
For the Year Ended December 31, 2015
Revenue
Sales revenue ....................................................

€1,280,000

Less: Sales returns and allowances ..............

€150,000

Sales discounts .....................................

45,000

195,000

Net sales revenue .............................................

1,085,000

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

621,000

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

464,000

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

194,000

Admin. and general expenses ......................

Other Income and Expense
Loss from impairment of plant assets ............

97,000

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

291,000

(120,000)
86,000

(34,000)

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

139,000

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

60,000

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

79,000

Income tax (€79,000 X .34)..............................

26,860

Net income...............................................................
Earnings per share (€52,140 ÷ 100,000) .......................

€

52,140
€52*

*Rounded

4-20

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