Solution manual financial accounting 9th harrison ch11

INCOME STATEMENT Earnings per share of common stock 10,000 shares of common stock outstanding: Income from continuing operations... Income Statement partial Year Ended December 31, 20

b Reporting revenue when a significant portion of the services are still

to be performed or goods are still to be delivered

c Providing incentives for customers to purchase more inventory than

is needed in return for future discounts or other benefits

d Reporting sales to fictitious or nonexistent customers, this may also include the falsification of shipping and inventory records

(10 min.) S 11-2

Req 1

Gross profit = $703,935 thousand ($1,825,425 − $1,121,490)

Income from continuing operations = $63,026 thousand

Net income = $60,626 thousand

Req 2

Income from continuing operations = $63,026 thousand

Continuing operations will continue from period to period Their continuity makes income from continuing operations a good predictor of future net income

(10-15 min.) S 11-3

Amazing Way, Inc

Income Statement Year Ended December 31, 2012

(Thousands)

Net sales revenue $181,000 Cost of goods sold 73,000 Gross profit 108,000

Operating income 53,000 Other gains (losses) (19,000)

Income tax expense (35%) 11,900 Income from continuing operations 22,100 Loss on discontinued operations, $13,000,

less income tax savings of $4,550 (8,450) Income before extraordinary item 13,650 Extraordinary gain, $3,000,

less income tax of $1,050 1,950 Net income $ 15,600

(10-15 min.) S 11-4

Estimated value

= Earnings per share = $2.20 = $44.00

Mango’s stock is quoted at $94.02 At that price, an investor should sell because the investor believes the stock is worth only $44.00

Student responses will vary depending on the market price accessed by the student

(10 min ) S 11-5

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Sept 12 Accounts Receivable (200,000 x $.34) 68,000

(10-15 min.) S 11-6

Req 1

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Apr 24 Cash (900,000 pesos × $0.099) 89,100

Accounts Receivable (900,000 pesos × $0.094) 84,600

Collection on account

Req 2

Oct 25 Accounts Payable

(21,000 Swiss francs × $1.12)… 23,520

Payment on account

Req 3

Both the Mexican peso and the Swiss franc strengthened against the U.S dollar.

(15 min.) E 11-7

Req 1

The discontinued operations were more like a revenue This is clear from

the fact that their amount is added in determining net income

Req 2

The discontinued operations should be included in net income because

they represent revenues, which are a basic component of net income

Req 3

Use Income from continuing operations ($12,400 million) to predict

future income because that amount of income is most likely to repeat in future years

(5-10 min.) S 11-8

Journal

Recorded income tax for the year

2 INCOME STATEMENT

Earnings per share of common stock

(10,000 shares of common stock outstanding):

Income from continuing operations

(5-10 min.) S 11-10

Req 1

Amazing Way, Inc

Income Statement (partial) Year Ended December 31, 2012

Other comprehensive income:

Foreign-currency translation adjustment… 2,400 3,500

Req 2

Earnings per share is not reported for other comprehensive income; it is

reported only for net income and its components

(10 min.) S 11-11

Req 1

Earnings

Req 2

Earnings per share of common stock:

Income (loss) before extraordinary item……… X.XX

Req 3

Earnings per share is useful because it relates a company’s income to one share of the company’s stock Since stock prices are quoted at an amount per share, earnings per share is useful to help determine the value of one share of stock

(10 min.) S 11-12

iLife Inc

Statement of Retained Earnings Year Ended December 31, 2012 Retained earnings balance, December 31, 2011,

(10 min.) S 11-13

Req 1

$1,380,000 ($200,000 + $1,180,000)

Req 2

The stock dividend:

 decreased retained earnings by $72,000

 increased total paid-in capital by $72,000 ($30,000 + $42,000)

 had no effect on total stockholders’ equity

 had no effect on total assets

Req 3

Cost of treasury stock purchased = $8,000

Cost of treasury stock sold = $3,000

Proceeds from sale of treasury stock = $13,000 ($3,000 + $10,000)

(10-15 min.) S 11-14

Req 1

Management of Westminster Computer Inc is responsible for the

company’s financial statements

SLMA, LLP, auditors located in Aurora, Colorado, gave an outside

opinion on Westminster’s financial statements SLMA, LLP released its

opinion on December 28, 2012

Req 5

Exercises

(15-20 min.) E 11-15A

Req.1

Dupree Cycles, Inc

Income Statement Year Ended September 30, 2012

Thousands

Total operating expenses 12,200

Income from continuing operations before

income tax 800

Income tax expense 285

Income from continuing operations 515

Income from discontinued operations, $320, less income tax, $64 256

Income before extraordinary item 771

Extraordinary loss, $12, less income tax saving, $2 (10)

Net income $ 761

Req.2 Dupree Cycles, Inc Statement of Comprehensive Income Year Ended September 30, 2012 Thousands Net income……… $ 761

Other comprehensive income (loss):

(20-25 min.) E 11-16A

Req 1

Moran Book Company Income Statement Year Ended December 31, 2012

Thousands

Sales revenue $106,000 Other revenues 1,700 Total revenue 107,700 Total operating expenses 97,600 Income tax expense 4,040 Income from continuing operations* 6,060 Extraordinary gain, $2,000, less

income tax, $800 1,200 Net income $ 7,260

Earnings per share (EPS):

Income from continuing operations*

Accounts Payable (600,000 yen × $.0087)… 5,220

19 Accounts Receivable (30,000 euros × $1.17)… 35,100

On July 23, Twitter wanted the euro to strengthen in order to receive euros that were worth more in dollars The euro weakened against the dollar, and Twitter had a foreign-currency transaction loss on the collection

(10 min.) E 11-19A

Req 1

outstanding

980,000

(10 min.) E 11-21A

(Amounts in millions, except per-share amounts)

Earnings per share of common stock (600* shares

outstanding):

Discontinued operations, net of tax ($82 / 600)………… 0.14 Income before extraordinary gain, net of tax ($657 / 600) 1.10 Extraordinary gain, net of tax ($6 / 600)……… .01

(15-25 min.) E 11-23A

Mendonca Mall, Inc

Statement of Stockholders’ Equity Year Ended December 31, 2013

$0.50 Par Common Stock

Additional Paid-in Capital

Retained Earnings Total Balance, Dec 31, 2012 $175,000 $ 900,000 $620,000 $1,695,000 Stock dividend 15,750 677,250 (693,000*) —— Issuance of common

Cash dividends (182,000) (182,000) Balance, Dec 31, 2013 $191,900 $1,610,600 $ 95,000 $1,897,500

_

*350,000 shares × 09 × $22 per share = $693,000

(20-25 min.) E 11-24A

Req 1

(Thousands)

$3.50 Par Common Stock

Additional Paid In Capital

Retained Earnings

Accum Other Comprehensive Income

Total Shareholders’ Equity

(15-20 min.) E 11-25B

Req.1

Whitney Cycles, Inc

Income Statement Year Ended September 30, 2012

Thousands

Income from continuing operations before

Income from discontinued operations,

Extraordinary loss, $13, less income tax saving, $1 (12)

Req.2

Whitney Cycles, Inc

Statement of Comprehensive Income Year Ended September 30, 2012

Thousands

(20-25 min.) E 11-26B

Req 1

Bergeron Book Company Income Statement Year Ended December 31, 2012

Thousands

Extraordinary gain, $1,600, less

Earnings per share (EPS):

Income from continuing operations*

Bergeron Book stock capitalization rate

(10-15 min.) E 11-27B

value of

= continuing operations

Beta, Inc stock capitalization rate

i

$54.30

Accounts Payable (400,000 yen × $.0083)… 3,320

Foreign-Currency Transaction Gain……… 200

22 Accounts Receivable (10,000 euros × $1.17)… 11,700

On June 23, Better Buy wanted the euro to strengthen in order to receive euros that were worth more in dollars The euro weakened against the dollar, and Better Buy had a foreign-currency transaction loss on the collection

(10-15 min.) E 11-29B

Req 1

2012 Income Tax Expense ($300,000 × 25)…… 75,000

Deferred Tax Liability ($40,000 × 25)…… 10,000

outstanding

1,400,000

(10 min.) E 11-31B

(Amounts in millions, except per-share amounts)

Earnings per share of common stock (800* shares

outstanding):

Income from continuing operations ($583 / 800)………… $ 0.73 Discontinued operations, net of tax savings ($87 / 800)… (0.11) Income before extraordinary gain, net of tax ($496 / 800) 0.62 Extraordinary gain, net of tax ($4 / 800)……… 01

_

*1,000 shares issued − 200 treasury shares = 800 shares outstanding

The prior-period adjustment does not affect net income for 2012

(15-25 min.) E 11-33B

Rondeau Mall, Inc

Statement of Stockholders’ Equity Year Ended December 31, 2013

$1.50 Par Common Stock

Additional Paid-in Capital

Retained Earnings Total Balance, Dec 31, 2012 $465,000 $500,000 $640,000 $1,605,000 Stock dividend 23,250 286,750 (310,000*) —— Issuance of common

Cash dividends (187,000) (187,000) Balance, Dec 31, 2013 $491,100 $812,400 $489,000 $1,792,500

_

*310,000 shares × 05 × $20 per share = $310,000

(20-25 min.) E 11-34B

Req 1

(Thousands)

$3.00 Par Common Stock

Additional Paid In Capital

Retained Earnings

Accum Other Comprehensive Income

Total Shareholders’ Equity

Sales revenue $540,000 Dividend revenue 13,000 Gain on lawsuit settlement 7,000 Total revenues and gains 560,000

Expenses and losses:

Cost of goods sold $304,000

Selling expenses 82,000

General expenses 71,900

Interest expense 23,000

Loss on sale of plant assets 11,000

Income tax expense 27,300

Total expenses and losses 519,200

Income from discontinued operations,

$14,000, less income tax, $5,600 8,400 Income before extraordinary items 49,200 Extraordinary loss, $29,000, less

(continued) P 11-48A

Req 1 (continued)

Earnings per share:

Income from continuing operations

Computations:

*Preferred dividends: $90,000 × 08 = $7,200

**Common shares outstanding: 21,000 (24,000 issued – 3,000 treasury)

Req 2

The company hoped to earn income from continuing operations equal

to 13% of sales Income from continuing operations was only 7.56% of sales ($40,800 / $540,000), which was less than the target earnings of 13% of sales

(10-15 min.) P 11-49A

Crowley Cosmetics, Inc

Statement of Retained Earnings Year Ended December 31, 2012 Retained earnings balance, December 31, 2011,

Retained earnings balance, December 31, 2011,

(10-15 min — after working P 11-48A) P 11-50A

Estimated value

of Crowley

common stock

Estimated annual Income from continuing

= income in the future = operations ($40,800) = $408,000

Current market value of

= $462,000 (21,000 shares* × $22 per share) Crowley common stock

The investors would offer approximately $408,000 The owners of Crowley Cosmetics probably would not accept $408,000 because their outstanding stock is now worth around $462,000

_

*Issued shares……… 24,000

Less Treasury shares……….… (3,000)

Outstanding shares……… 21,000

Income statement (partial):

Other revenue and expense:

(continued) P 11-51A

Req 2

This problem demonstrates that the final amount of a cash receipt or cash payment on an international transaction may differ from the initial dollar amount of the transaction You can learn the need to hedge receivable and payable positions denominated in foreign currencies This will help to minimize foreign-currency transaction losses

(25-35 min.) P 11-52A

Req 1

Earnings per share:

Income from continuing operations

(30-40 min.) P 11-53A

Sunny Pie Foods, Inc

Statement of Comprehensive Income

Year Ended June 30, 2012 Revenues:

Sales revenue $894,000

Less: Sales returns $20,000

Sales discounts 14,000 (34,000) Net sales revenue 860,000

Loss on discontinued operations, $25,000,

less income tax savings of $7,500 (17,500)

Income before extraordinary item 219,500

Extraordinary gain, $36,000, less

income tax of $10,800 25,200

Net income 244,700

Other comprehensive income:

Unrealized loss on available-for-sale

investments, $10,000,less income tax savings

of $3,000…………

(7,000)

Comprehensive income $237,700

(continued) P 11-53A

Earnings per share:

Income from continuing operations ($237,000 / 10,000*) $23.70 Loss on discontinued operations ($17,500 / 10,000)…… (1.75) Income before extraordinary item ($219,500 / 10,000)… 21.95

_

Computation of common shares outstanding:

*17,000 shares issued − 7,000 treasury shares = 10,000 shares outstanding

(25-35 min.) P 11-54A

Req 1

+ Additional taxable income for income

− Additional depreciation expense for

Req 2

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

2012 Income Tax Expense ($170,000 × 40)…… 68,000

Deferred Tax Liability ($29,000 × 40)… 11,600

Req 3

Mahoney Publications, Inc

Income Statement Year Ended December 31, 2012

Par value of common stock:

$100 million par value

= $0.50 per share

= $1.10 per share

200 million shares

issued

Req 4

Cost of treasury stock sold: $ 7 million

Selling price of treasury stock sold: $ 18 million

Increase in total stockholders’ equity: $ 18 million

Req 5

(20-30 min.) P 11-56B

Req 1

Shaw Cosmetics, Inc

Income Statement Year Ended December 31, 2012 Revenues:

Expenses and losses:

Loss on sale of plant assets……… 15,000

Income from discontinued operations,

Extraordinary loss, $34,000,

less income tax savings of $13,500……… (20,500)

(continued) P 11-56B

Req 1 (continued)

Earnings per share:

Income from continuing operations

Computations:

*Preferred dividends: $30,000 x 6% = $1,800

**Common shares outstanding: 25,000 (30,000 issued - 5,000 treasury)

Req 2

The company hoped to earn income from continuing operations equal

to 11% of sales Income from continuing operations was only 7.03% of sales ($40,050 / $570,000), which was less than the target earnings of 11% of sales

(10-15 min.) P 11-57B

Shaw Cosmetics, Inc Statement of Retained Earnings Year Ended December 31, 2012 Retained earnings balance, December 31, 2011

Retained earnings balance, December 31, 2011