Chapter 4 Course

BRIEF EXERCISE 4-1
STARR CO.
Income Statement
For the Year 2010
Sales .......................................................................................... £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
BRIEF EXERCISE 4-2

BRISKY CORPORATION
Income Statement
For the Year Ended December 31, 2010
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
458,000
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 4-4

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
1 | Page Dr. Magdy Kamel
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. Income from operations
2. Income before income tax
4. Gross profit
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 (504,000)
Net income.............................................................................. $10,096,000
Earnings per share...............................................................
Income from continuing operations.................... $1.06
Discontinued operations, net of tax.................... (0.05)*
Net income................................................................... $1.01
*Rounded
BRIEF EXERCISE 4-8

2010 2009 2008
Income before income tax $180,000 $145,000 $170,000
Income tax (30%) 54,000 43,500 51,000
Net Income $126,000 $101,500 $119,000
BRIEF EXERCISE 4-10

$1,000,000 – $250,000
190,000
= $3.95 per share
BRIEF EXERCISE 4-11
PORTMAN CORPORATION
Retained Earnings Statement
Retained earnings, January 1 ................................................. $ 675,000
Add: Net income ....................................................................... 1,400,000
2,075,000
Less: Cash dividends............................................................... 75,000
Retained earnings, December 31........................................... $2,000,000
BRIEF EXERCISE 4-12

PORTMAN CORPORATION
Retained earnings, January 1, as reported......................... $ 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 ........................................... $2,080,000
EXERCISE 4-8 (15–20 minutes)

(a) Net sales ..................................................................................... € 540,000
Less: Cost of goods sold..................................................... (260,000)
Administrative expenses ......................................... (100,000)
Selling expenses ........................................................ (80,000)
Discontinued operations-loss................................ (40,000)
Income before income tax .................................................... 60,000
Income tax (€60,000 X .30) .................................................... 18,000
Net income................................................................................. € 42,000
(b) Income before income tax .................................................... €100,000*
Income tax (€100,000 X .30).................................................. 30,000
Income from continuing operations.................................. 70,000
Discontinued operations, less applicable
income tax of €12,000 ......................................................... (28,000)
Net income................................................................................. € 42,000
*€60,000 + €40,000
Earnings per share:
Income from continuing operations
(€70,000 ÷ 20,000)............................................................. € 3.50
Loss on discontinued operations, net of tax.............. (1.40)
Net Income (€42,000 ÷ 20,000)......................................... € 2.10

BROKAW CORP.
(a)
Income Statement

Sales Revenue
Net sales.................................................................... $1,200,000
Cost of goods sold................................................. 780,000
Gross profit.................................................. 420,000
Selling expenses .................................................... $65,000
Administrative expenses..................................... 48,000 113,000
307,000
Dividend revenue .............................................. 20,000
Interest revenue................................................. 7,000
Write-off of inventory due to
obsolescence.................................................. (80,000) (53,000)
Income from operations.............................................. 254,000
Interest expense............................................................. 50,000
Income before income tax.......................................... 204,000
Income tax ........................................................... 69,360
Net income....................................................................... $ 134,640
Earnings per share
Net income ($134,640 ÷ 60,000).................... $2.24*
*Rounded
EXERCISE 4-9 (Continued)

BROKAW CORP.
(b)
Retained earnings, Jan. 1, as reported................................... $ 980,000
Correction for overstatement of net income in prior
period (depreciation error) (net of $13,600 tax)................ (26,400)
Retained earnings, Jan. 1, as adjusted................................... 953,600
Add: Net income........................................................................... 134,640
1,088,240
Less: Dividends declared........................................................... 45,000
Retained earnings, Dec. 31......................................................... $1,043,240

Computation of net income:
2010 net income after tax .................................. R$33,000,000
2010 net income before tax
[R$33,000,000 ÷ (1 – .20)] .............................. 41,250,000
Add back discontinued operations loss....... 12,000,000
Income before income tax ............................ 53,250,000
Income taxes (20% X R$53,250,000) .............. 10,650,000
Income from continuing operations .............. 42,600,000
Discontinued operations:
Loss from discontinued operations.......... R$12,000,000
Less: Applicable income tax reduction...... 2,400,000 9,600,000
Net income.............................................................. R$33,000,000
Net income......................................................................................... R$33,000,000

Less: Provision for preference dividends
(6% of R$4,500,000).................................................... 270,000
Income available to capital shareholders......................... 32,730,000
Capital shares............................................................................ ÷ 10,000,000
Earnings per share................................................................... R$3.27*
Income statement presentation
Earnings per share:
Income from continuing operations............................ R$4.23a
Discontinued operations, net of tax............................ (0.96) b
Net income........................................................................... R$3.27
aR$42,600,000 –
bR$9,600,000
R$270,000
10,000,000 10,000,000
= R$4.23* = R$0.96*
*Rounded

WOODS CORPORATION
Income Statement
Net sales(a)............................................................................ $4,062,000
Cost of goods sold(b)........................................................ 2,665,000
Gross profit .................................................................. 1,397,000
Selling expenses(c) ............................................................ $636,000
Administrative expenses(d)............................................. 491,000 1,127,000
Other income and expense............................................ 240,000
Rent revenue....................................................................... 270,000
Income from operations (interest)............................... 510,000
Interest expense................................................................ 176,000
Income before income tax.............................................. 334,000
Income tax ($334,000 X .30) .................................... 100,200
Income from continuing operations ........................... 233,800
Discontinued operation
Loss on sale of division.................................................. $ 60,000
Less: Applicable income tax................................. 18,000 (42,000)
Net income .......................................................................... $ 191,800
Earnings per share
($900,000 ÷ $10 par value = 90,000 shares)
Income from continuing operations ($233,800 ÷ 90,000)........ $2.60*
Discontinued operations, net of tax............................................... (0.47)*
Net income.............................................................................................. $2.13
*Rounded
Supporting computations
(a) Net sales:
$4,175,000 – $34,000 – $79,000 = $4,062,000
(b) Cost of goods sold:
$535,000 + ($2,786,000 + $72,000 – $27,000 – $15,000) – $686,000 =
$2,665,000
Au: Is it correct? Pls confirm
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(c) Selling expenses:
$284,000 + $83,000 + $69,000 + $54,000 + $93,000 + $36,000 + $17,000 =
$636,000
(d) Administrative expenses:
$346,000 + $33,000 + $24,000 + $48,000 + $32,000 + $8,000 = $491,000
(a) McENTIRE CORPORATION
Balance, January 1, as reported ............................................ $225,000*
Correction for depreciation error (net of $5,000 tax).......
(20,000)
Cumulative decrease in income from change in
inventory methods (net of $9,000 tax).......................... (36,000)
Balance, January 1, as adjusted ............................................ 169,000
Add: Net income....................................................................... 176,000**
345,000
Less: Dividends declared........................................................ 100,000
Balance, December 31............................................................... $245,000
*($40,000 + $125,000 + $160,000) – ($50,000 + $50,000)
**[$220,000 – (20% X $220,000)]
(b) Total retained earnings would still be reported as $245,000. A restriction
does not affect total retained earnings; it merely labels part of the retained
earnings as being unavailable for dividend distribution. Retained earnings
would be reported as follows:
Retained earnings:
Appropriated............................................................... $ 70,000
Unappropriated .......................................................... 175,000
Total......................................................................... $245,000

Net income:
Income before income tax....................................... €21,650,000
Income tax (35% X €21,650,000) ............................ 7,577,500
Income from continuing operations .................... 14,072,500
Loss before income tax..................................... €3,225,000
Less: Applicable income tax (35%).............. 1,128,750 (2,096,250)
Net income.................................................................... €11,976,250
Preference dividends declared: ................................... € 860,000
Weighted average shares outstanding........................... 4,000,000
Earnings per share
Income from continuing operations .................... €3.30*
Discontinued operations, net of tax..................... (0.52)**
Net income.................................................................... €2.78***
*(€14,072,500 – €860,000) ÷ 4,000,000. (Rounded)
**€2,096,250 ÷ 4,000,000. (Rounded)
***(€11,976,250 – €860,000) ÷ 4,000,000.
(a) 2010
Income before income tax ..................................... $460,000
Income tax (35%)....................................................... 161,000
Net Income .................................................................. $299,000
(b) Cumulative effect for years prior to 2010:
Year
Weighted
Average FIFO Difference
Tax Rate
(35%) Net Effect
$395,000
$25,000
30,000
420,000
Total $55,000 $19,250 $35,750
(c) 2010 2009 2008
$395,00
Income before income tax $460,000 $420,000 0
Income tax (35%) 161,000 147,000 138,250
Net income $299,000 $273,000 $256,75
0
ARMSTRONG CORPORATION
Income Statement and Comprehensive Income Statement
Sales ........................................................................................................ $1,200,000
Cost of goods sold.............................................................................. 720,000
Gross profit ........................................................................................... 480,000
Selling and administrative expenses............................................ 320,000
Net income............................................................................................. $ 160,000
Net income............................................................................................. $ 160,000
Unrealized holding gain .................................................................... 15,000
Comprehensive income .................................................................... $ 175,000
Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 4-31
Share
Capital—Ordinary
Retained
Earnings
Unrealized Gains on
Available-for-Sale
Financial Assets
Total
Equity
Beginning balance
Total comprehensive
income $350,000 $ 90,000 $80,000
Dividends
Ending balance
170,000*
(50,000)
(10,000)
$30,000
$250,000
$350,000
(10,000)
$630,000
*($750,000 – $500,000 – $80,000).
(a) GIBSON INC.
Income Statement
Sales ............................................................................... $1,700,000
Cost of goods sold..................................................... 850,000
Gross profit .................................................................. 850,000
Selling expenses......................................................... $300,000
Administrative expenses ......................................... 240,000 540,000
310,000
Gain on sale of plant assets....................... 95,000
Rent revenue.................................................... 40,000
Loss on impairment of land........................ (60,000) 75,000
Income before income tax........................................... 385,000
Income tax ........................................................................ 119,000
Income from continuing operations ........................ 266,000

Loss on discontinued operations.................. $ 75,000
Less: Applicable income tax reduction ...... 25,500 (49,500)
Net income........................................................................ 216,500
Other comprehensive income
Unrealized holding gain .................................... 15,000
Comprehensive income .................................... $231,500
Earnings per share:
Income from continuing operations
($266,000 ÷ 100,000) ........................................................ $2.66
Loss on discontinued operations, net of tax ............... (0.49)
Net income ($216,500 ÷ 100,000)..................................... $2.17
GIBSON INC.
(b)
Retained earnings, January 1........................................................ $600,000
Add: Net income ............................................................................. 216,500
816,500
Less: Dividends declared............................................................... 150,000
Retained earnings, December 31.................................................. $666,500

HASBRO INC.
Statement of Changes in Equity
For the year ended December 31, 2010
Share
Capital—
Ordinary
Retained
Earnings
Unrealized gains on
Available-for-Sale
Financial Assets
Total
Equity
Beginning balance $300,000 $20,000 $50,000 $370,000
Capital shares 30,000 30,000
Total comprehensive
income 100,000 (5,000) 95,000
Dividends (9,000) (9,000)
Ending balance $330,000 $111,000 $45,000 $486,000

SOLUTIONS TO PROBLEMS
PROBLEM 4-1
1. E
2. C
3. A
4. C
5. B
6. G
7. C
8. B
9. H
10. F
11. C
12. D
PROBLEM 4-2
DICKINSON COMPANY
Income Statement
Sales ................................................................................. $25,000,000
Cost of goods sold....................................................... 16,000,000
Gross profit .................................................................... 9,000,000
Selling and administrative expenses..................... 4,700,000
4,300,000
Gain on the sale of investments ................. $ 110,000
Loss due to flood damage (390,000)
Write-off of goodwill........................................ (820,000) (1,100,000)
Income from operations............................................. 3,200,000
Interest expense............................................................ 70,000
Income before income tax......................................... 3,130,000
Income tax....................................................................... 1,244,000
Income from continuing operations....................... 1,886,000
Loss on operations, net of tax..................... 90,000
Loss on disposal, net of tax ......................... 440,000 (530,000)
Net income...................................................................... $ 1,356,000
PROBLEM 4-2 (Continued)
Earnings per share:
Income from continuing operations.......................... $3.61a
Loss on operations, net of tax ......................... $(0.18)
Loss on disposal, net of tax.............................. (0.88) (1.06)
Net income......................................................................... $2.55b
a$1,886,000 – $80,000

500,000 shares
= $3.61
b$1,356,000 – $80,000
500,000 shares
= $2.55
DICKINSON COMPANY
Retained earnings, January 1 ....................................... $ 980,000
Add: Net income............................................................. 1,356,000
2,336,000
Less: Dividends
Preference shares................................................ $ 80,000
Ordinary shares.................................................... 250,000 330,000
Retained earnings, December 31................................. $2,006,000
PROBLEM 4-3
THOMPSON CORPORATION
Income Statement
Net sales (£1,100,000 – £14,500 – £17,500) ................... £1,068,000
Cost of goods sold*.............................................................. 645,000
Gross profit ............................................................................. 423,000
Selling expenses.................................................................... £232,000
Administrative expenses .................................................... 99,000 331,000
92,000
Gain on sale of land ................................................. 30,000
Rent revenue............................................................... 18,000 48,000
Income before income tax.................................................. 140,000
Income tax ................................................................... 53,900
Net income............................................................................... £ 86,100
Earnings per share (£86,100 ÷ 30,000) ........................... $2.87
*Cost of goods sold: Can be verified as follows:
Merchandise inventory, Jan. 1 .................................... £ 89,000
Purchases .......................................................................... £610,000
Less: Purchase discounts........................................... 10,000
Net purchases................................................................... 600,000
Add: Freight-in ............................................................... 20,000 620,000
Merchandise available for sale.................................... 709,000
Less: Merchandise inventory, Dec. 31 .................... 64,000
Cost of goods sold ...................................................... £ 645,000
THOMPSON CORPORATION

Retained earnings, January 1 ....................................................... £160,000
Add: Net income............................................................................. 86,100
246,100
Less: Cash dividends..................................................................... 45,000
Retained earnings, December 31................................................. £201,100
PROBLEM 4-4
MAHER INC.
Income Statement (Partial)
Income before income tax................................................... $748,500(a)
Income tax ($748,500 X .30) .................................... 224,550
Income from continuing operations................................. 523,950
Loss from disposal of recreational division ..... $115,000
Less: Applicable income tax reduction............. 34,500 (80,500)
Net income................................................................................ $443,450
Earnings per share:
Income from operations........................................... $4.37*
Discontinued operations, net of tax..................... (0.67)*
Net income ($443,450 ÷ 120,000)........................... $3.70
*Rounded
(a)Computation of income before income tax:
As previously stated ................................... $790,000
Uninsured flood loss................................... (90,000)
Gain on sale of securities.......................... 47,000
Error in computation of depreciation
As computed ($54,000 ÷ 6).............................. $9,000
Corrected ($54,000 – $9,000) ÷ 6................... (7,500) 1,500
As restated ........................................................... $748,500
Note: No adjustment is needed for the inventory method change, since the
new method is reported in 2010 income. The cumulative effect on prior years
of retroactive application of the new inventory method will be recorded in
retained earnings.
PROBLEM 4-5
TWAIN CORPORATION
Income Statement
For the Year Ended June 30, 2010
Sales Revenue
Sales ................................................................................ $1,578,500
Less: Sales discounts............................................... $31,150
Sales returns ................................................... 62,300 93,450
Net sales......................................................................... 1,485,050
Cost of goods sold............................................................. 896,770
Gross profit .......................................................................... 588,280
Selling expenses
Sales commissions ................................ $97,600
Sales salaries ........................................... 56,260
Travel expense......................................... 28,930
Freight-out................................................. 21,400
Entertainment expense......................... 14,820
Telephone and internet exp. ............... 9,030
Building expense .................................... 6,200
Depr. of sales equipment ..................... 4,980
Bad debt expense ................................... 4,850
Misc. selling expenses.......................... 4,715 248,785
Administrative Expenses
Building expense........................................... 9,130
Real estate and other local taxes............. 7,320
Depreciation of office furniture
and equipment ............................................ 7,250
Office supplies used..................................... 3,450
Telephone and internet expense.............. 2,820
Miscellaneous office expenses................. 6,000 35,970 284,755
303,525
Dividend revenue........................................... 38,000
Income from operations..................................... 341,525
Bond interest expense................................. 18,000
Income before income tax................................. 323,525
Income tax........................................................ 102,000
Net income.............................................................. $ 221,525
Earnings per share
[($221,525 – $9,000) ÷ 80,000] ....................... $2.66*
*Rounded
TWAIN CORPORATION
For the Year Ended June 30, 2010
Retained earnings, July 1, 2009, as reported......... $337,000
Correction of depreciation understatement,
net of tax ........................................................................ (17,700)
Retained earnings, July 1, 2009, as adjusted......... 319,300
Add: Net income ............................................................. 221,525
540,825

Less:
Dividends declared on preference shares...... 9,000
Dividends declared on ordinary shares ....... 37,000 46,000
Retained earnings, June 30, 2010.............................. $494,825
PROBLEM 4-6
1. The impairment of intangibles charge of ¥8,500,000 should be disclosed
separately, assuming it is material. This charge is shown above income
before income tax and would not be reported net of tax. This item should
be separately disclosed to inform the users of the financial statements
that this item is nonrecurring and therefore may not impact next year’s
results. Furthermore, trend comparisons may be misleading if such an
item is not highlighted and adjustments made.
2. The loss on sale of equipment of ¥17,000,000 should be reported in the
other income and expense section of the income statement. The reason
for the separate disclosure is much the same as that given above for
the separate disclosure of the impairment of intangibles charge.
3. The adjustment required for correction of an error is inappropriately
labeled and also should not be reported in the retained earnings
statement. Changes in estimate should be handled in current and future
periods through the income statement. Catch-up adjustments are not
permitted. To restate financial statements every time a change in estimate occurred
would be extremely costly. In addition, adjusting the beginning balance of retained
earnings is inappropriate as the increased
charge in this case affects current and future income statements.
4. Earnings per share should be reported on the face of the income
statement and not in the notes to the financial statements. Because
such importance is ascribed to this statistic, the profession believes it
necessary to highlight the earnings per share figure.
PROBLEM 4-7
(a) ACADIAN CORP.
Retained earnings, January 1, as reported................................... $257,600
Correction of error from prior period.............................................. 25,400
Adjustment for change in accounting principle.......................... (23,200)
Retained earnings, January 1, as adjusted................................... 259,800
Add: Net income.................................................................................. 52,300*
Less: Cash dividends declared ....................................................... 32,000
Retained earnings, December 31 ..................................................... $280,100
*$52,300 = ($84,500 + $41,200 + $21,600 – $35,000 – $60,000)
(b) 1. Gain on sale of investments—body of income statement. This gain
should be shown under other income and expense on the income
statement.
2. Refund on litigation with government—body of income statement.

This refund should be shown under other income and expense on
the income statement.
3. Loss on discontinued operations—body of the income statement,
following the caption, “Income from continuing operations.”
4. Write-off of goodwill—body of income statement. The write-off
should be shown under other income and expense on the income
statement.
PROBLEM 4-8
WADE CORP.
Income Statement (Partial)
Income before income tax............................. €1,325,000*
Income tax ............................................... 265,000**
Income from continuing operations .......... 1,060,000
Loss from operations of
discontinued subsidiary................. € 90,000
Less: Applicable income tax
reduction............................ 18,000 €72,000
Loss from disposal of subsidiary .......
100,000
Less: Applicable income tax
reduction............................. 20,000 80,000 (152,000)
Net income ......................................................... € 908,000
Earnings per share:
Income from continuing operations ......................................... €7.06
Discontinued operations, net of tax.......................................... (1.01)
Net income (€908,000 ÷ 150,000)................................................ €6.05
*Computation of income before income tax:
As previously stated €1,210,000
Loss on sale of equipment [€40,000 – (€80,000 – €30,000)] (10,000)
Gain on condemnation of property 125,000
Restated €1,325,000
**Computation of income tax expense:
€1,325,000 X .20 = €265,000
Note: The error related to the intangible asset was correctly charged to
retained earnings.

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BRIEF EXERCISE 4-1

Note: The increase in value of employees is not reported

BRIEF EXERCISE 4-2

BRIEF EXERCISE 4-4

BRIEF EXERCISE 4-8

BRIEF EXERCISE 4-10

BRIEF EXERCISE 4-12

EXERCISE 4-8 (15–20 minutes)

EXERCISE 4-9 (30–35 minutes)

3 | Page Dr. Magdy Kamel

EXERCISE 4-9 (Continued)

EXERCISE 4-10 (20–25 minutes)

Net income......................................................................................... R$33,000,000

EXERCISE 4-11 (20–25 minutes)

6 | Page Dr. Magdy Kamel

8 | Page Dr. Magdy Kamel

EXERCISE 4-18 (10–15 minutes)

9 | Page Dr. Magdy Kamel

10 | Page Dr. Magdy Kamel

11 | Page Dr. Magdy Kamel

13 | Page Dr. Magdy Kamel

14 | Page Dr. Magdy Kamel

15 | Page Dr. Magdy Kamel

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