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Chapter 4

The Income Statement, Comprehensive Income,


and the Statement of Cash Flows

EXERCISES
Exercise 4-1Requirement 1

APEX COMPUTER CORPORATION


Income Statement
For the Year Ended December 31, 2013
Revenues and gains:
Sales ...............................................................................
Interest revenue .............................................................
Gain on sale of equipment .............................................
Total revenues and gains .............................................
Expenses and losses:
Cost of goods sold .........................................................
Administrative expense...................................................
Selling expense...............................................................
Restructuring costs ........................................................
Interest expense .............................................................
Total expenses and losses ...........................................
Income before income taxes and extraordinary item.........
Income tax expense *.....................................................
Income before extraordinary item .....................................
Extraordinary item:
Loss from hurricane damage (net of $120,000 tax benefit) .....
Net loss .............................................................................
Earnings per share:
Income before extraordinary item .....................................
Extraordinary loss .............................................................
Net loss .............................................................................

$3,400,000
35,000
30,000
3,465,000
$2,250,000
450,000
150,000
400,000
20,000
3,270,000
195,000
78,000
117,000
(180,000)
$ (63,000)
$ .23
(.36)
$.(13)

* 40% x $195,000

Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2013


4-1

Exercise 4-1 (concluded)


Requirement 2
APEX COMPUTER CORPORATION
Income Statement
For the Year Ended December 31, 2013
Sales revenue .......................................................
Cost of goods sold ...............................................
Gross profit ..........................................................
Operating expenses:
Administrative expense......................................
Selling expense...................................................
Restructuring costs ............................................
Total operating expenses ................................
Operating income .................................................
Other income (expense):
Interest revenue .................................................
Gain on sale of equipment .................................
Interest expense .................................................
Total other income (expense), net ..................
Income before income taxes and extraordinary
item.................................................................
Income tax expense *............................................
Income before extraordinary item ........................
Extraordinary item:
Loss from hurricane damage (net of $120,000 tax
benefit)

Net loss ................................................................


Earnings per share:
Income before extraordinary item ........................
Extraordinary loss ................................................
Net loss ................................................................

$3,400,000
2,250,000
1,150,000
$450,000
150,000
400,000
1,000,000
150,000
35,000
30,000
(20,000)
45,000
195,000
78,000
117,000
(180,000)
$ (63,000)
$ .23
(.36)
$.(13)

* 40% x $195,000

Exercise 4-2
The McGraw-Hill Companies, Inc., 2013
4-2

Intermediate Accounting, 7/e

BILIBONG COMPANY
Income Statement
For the Year Ended December 31, 2013
Income from continuing operations .....................................
Discontinued operations:
Loss from operations of discontinued component
(including gain on disposal of $300,000) *.................................
Income tax benefit .............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................

$ 500,000
(80,000)
32,000
(48,000)
$ 452,000

Earnings per share:


Income from continuing operations .....................................
Loss from discontinued operations ......................................
Net income ..........................................................................

$ 2.50
(.24)
$ 2.26

* Loss on discontinued operations:


Gain on sale of assets
Loss from operations
Total before tax loss
Less: Income tax benefit (40%)
Net of tax loss

$300,000
(380,000)
(80,000)
32,000
$ (48,000)

Exercise 4-3Requirement 1

OTTOBONI CORPORATION
Income Statement
For the Year Ended December 31, 2013
Income from continuing operations .....................................

$600,000

Discontinued operations:
Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2013


4-3

Loss from operations of discontinued component


(including impairment loss of $200,000) *.................................
Income tax benefit .............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................

(470,000)
188,000
(282,000)
$318,000

* Loss on discontinued operations:


Loss from operations
Impairment loss ($2,100,000 1,900,000)
Net before-tax loss
Income tax benefit (40%)
Net after-tax estimated loss on discontinued operations

The McGraw-Hill Companies, Inc., 2013


4-4

$ (270,000)
(200,000)
(470,000)
188,000
$ (282,000)

Intermediate Accounting, 7/e

Exercise 4-3 (concluded)


Requirement 2
OTTOBONI CORPORATION
Income Statement
For the Year Ended December 31, 2013
Income from continuing operations .....................................

$ 600,000

Discontinued operations:
Loss from operations of discontinued component *
Income tax benefit ............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................

(270,000)
108,000
(162,000)
$ 438,000

* Includes only the loss from operations during the year. There is no impairment
loss.

Alternate Exercises and Problem Solutions

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4-5

Exercise 4-4

THE RUFUS and CLEFT MINING COMPANY


Statement of Comprehensive Income
For the Year Ended December 31, 2013
Net income ...........................................................
Other comprehensive income (loss):
Foreign currency translation loss, net of tax .....
Unrealized gains on investment securities,
net of tax ........................................................
Total other comprehensive income ......................
Comprehensive income ........................................

Exercise
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

a_
a_
a_
b _
c_
b _
a_
b _
c_
a_

1.___ d
4-5exchange for a note payable.

$2,122,000
$(54,000)
114,000
60,000
$2,182,000

Purchase of equipment in

Payment of rent.
Collection of cash from customers.
Payment of interest on debt.
Purchase of a bond of another company.
Issuance of common stock for cash.
Sale of land for cash.
Receipt of interest on a note receivable.
Receipt of principal on a note receivable.
Payment of cash dividends to shareholders.
Payment to suppliers of inventory.

Exercise 4-6Requirement 1
Siegfried & Royce
Statement of Cash Flows
For the Year Ended December 31, 2013
The McGraw-Hill Companies, Inc., 2013
4-6

Intermediate Accounting, 7/e

($ in thousands)
Cash flows from operating activities:
Net income
$1,410
Adjustments for noncash effects:
Depreciation expense
400
Changes in operating assets and liabilities:
Increase in accounts receivable
(270)
Increase in inventory
(80)
Increase in prepaid rent
(50)
Decrease in accounts payable
(80)
Decrease in administrative & other payables
(50)
Increase in income taxes payable
100
Net cash flows from operating activities
$1,380
Cash flows from investing activities:
Purchase of plant and equipment

(400)

Cash flows from financing activities:


Proceeds from issuance of common stock
500
Proceeds from note payable
500
Net cash flows from financing activities 1,000
Net increase in cash

1,980

Cash, January 1
Cash, December 31

1,300
$3,280

Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2013


4-7

Requirement 2
Siegfried & Royce
Statement of Cash Flows
For the Year Ended December 31, 2013
($ in thousands)
Cash flows from operating activities:
Collections from customers
$12,230 (1)
Payment of rent
(300) (2)
Payment to inventory suppliers
(7,460) (3)
Payment for administrative & other exp.
(2,250) (4)
Payment of income taxes
(840) (5)
Net cash flows from operating activities
$ 1,380
(1) $12,500 less $270 increase in accounts receivable.
(2) $250 plus $50 increase in prepaid rent.
(3) $7,300 plus $80 increase in inventory plus $80 decrease in accounts payable.
(4) $2,200 plus $50 decrease in payables for admin. and other expenses.
(5) $940 less $100 increase in taxes payable.

The McGraw-Hill Companies, Inc., 2013


4-8

Intermediate Accounting, 7/e

PROBLEMS
Problem 4-1
AJAX COMPANY
Income Statement
For the Year Ended December 31, 2013
Sales revenue ......................................................
Cost of goods sold ..............................................
Gross profit .........................................................

$6,200,000
3,500,000
2,700,000

Operating expenses:
Administrative and selling ................................ $1,500,000
Restructuring costs ...........................................
250,000
Loss from landslide damage .............................
75,000
Total operating expenses ..............................
Operating income ...............................................
Other income (expense):
Interest revenue ................................................
Interest expense ...............................................
Loss on sale of equipment ................................
Income before income taxes and extraordinary
item...................................................................
Income tax expense ............................................
Income before extraordinary item .......................
Extraordinary item:
Gain on sale of land (net of $800,000 tax expense) ...
Net income .........................................................

100,000
(150,000)
(40,000)

1,825,000
875,000

(90,000)
785,000
314,000
471,000
1,200,000
$1,671,000

Note:
1. The restructuring costs are not an extraordinary item.
2. The loss caused by the landslide is not an extraordinary item.

Problem 4-2Requirement 1

HUNTINGTON STEEL CORPORATION


Comparative Income Statements
Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2013


4-9

For the Years Ended December 31


2013
Income from continuing operations before
income taxes [1] .......................................... $4,355,000
Income tax expense ..........................................
1,742,000
Income from continuing operations ..................
2,613,000
Discontinued operations:
Income from operations of discontinued
component (including gain on disposal of
$800,000 in 2013) [2] ........................................
345,000
Income tax expense .......................................
138,000
Income on discontinued operations ................
207,000
Net Income ....................................................... $2,820,000

2012
$3,475,000
1,390,000
2,085,000

325,000
130,000
195,000
$2,280,000

[1]

Income from continuing operations before income taxes:


2013
2012
Unadjusted
$3,900,000 $3,800,000
Add: Loss from discontinued operation
455,000
Deduct: Income from discontinued operation
(325,000)
Adjusted
$4,355,000 $3,475,000
[2]

Income from discontinued operations:

Income (loss) from operations


Gain on disposal
Total

2013
$(455,000)
800,000
$ 345,000

2012
$ 325,000
$325,000

Problem 4-2 (concluded)


Requirement 2
The 2013 income from discontinued operations would include only the loss from
operations of $455,000. Since no impairment loss is indicated ($7,000,000 6,200,000
= $800,000 anticipated gain), none is included. The anticipated gain on disposal is not
recognized until it is realized, presumably in the following year.
Requirement 3
The 2013 income from discontinued operations would include the loss from
operations of $455,000 as well as an impairment loss of $1,200,000 ($6,200,000 book
value of assets less $5,000,000 fair value).
The McGraw-Hill Companies, Inc., 2013
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Intermediate Accounting, 7/e

Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2013


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