Ch 4 In-class Problems

A.

The adjusted trial balance of Pacific Scientific Corporation on December 31, 2018, the end of the company’s fiscal
year, contained the following income statement items ($ in millions): sales revenue, $2,106; cost of goods sold,
$1,240; selling expenses, $126; general and administrative expenses, $105; interest expense, $35; and gain on
sale of investments, $45. Income tax expense has not yet been recorded. The income tax rate is 40%.

1. Prepare a single-step income statement for 2018. Ignore EPS disclosures.

2. Prepare a multiple-step income statement for 2018. Ignore EPS disclosures.

B.
The following is a partial trial balance for General Lighting Corporation as of December 31, 2018:
 
Account Title Debits Credits
Sales revenue  2,350,000
Interest revenue   80,000
Loss on sale of investments 22,500  
Cost of goods sold 1,200,300  
Loss from write-down of inventory due to obsolescence 200,000  
Selling expenses 300,000  
General and administrative expenses 150,000  
Interest expense 90,000  

 
300,000 shares of common stock were outstanding throughout 2018. Income tax expense has not yet been
recorded. The income tax rate is 40%.

1. Prepare a single-step income statement for 2018, including EPS disclosures.

2. Prepare a multiple-step income statement for 2018, including EPS disclosures.

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C.

On December 31, 2018, the end of the fiscal year, Revolutionary Industries completed the sale of its semiconductor
business for $10 million. The business segment qualifies as a component of the entity according to GAAP. The book
value of the assets of the segment was $8 million. The loss from operations of the segment during 2018 was $3.6
million. Pretax income from continuing operations for the year totaled $5.8 million. The income tax rate is 30%.

1. Prepare the lower portion of the 2018 income statement beginning with pretax income from continuing
operations. Ignore EPS disclosures.
2. Now, assume that the semiconductor segment was not sold during 2018 but was held for sale at year-end.
The estimated fair value of the segment’s assets, less costs to sell, on December 31 was $10 million.
Prepare the lower portion of the 2018 income statement beginning with pretax income from continuing
operations. Ignore EPS disclosures.

D.
Esquire Comic Book Company had income before tax of $1,000,000 in 2018 before considering the following
material items:
  

1. Esquire sold one of its operating divisions, which qualified as a separate component according to generally
accepted accounting principles. The before-tax loss on disposal was $350,000. The division generated
before-tax income from operations from the beginning of the year through disposal of $500,000. Neither the
loss on disposal nor the operating income is included in the $1,000,000 before-tax income the company
generated from its other divisions.
2. The company incurred restructuring costs of $80,000 during the year.

Prepare a 2018 income statement for Esquire beginning with income from continuing operations. Assume an
income tax rate of 40%. Ignore EPS disclosures.

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E.

Financial statements for Askew Industries for 2018 are shown below (in $000’s):
 
2018 Income Statement
  Comparative Balance Sheets
Sales $ 9,000   Dec. 31
Cost of goods sold  (6,300)   2018   2017
Gross profit   2,700  Assets              
Operating expenses  (2,000) Cash $ 600    $ 500 
Interest expense   (200) Accounts receivable   600      400 
Tax expense   (200) Inventory   800      600 
Net income $ 300  Property, plant, and equipment (net)   2,000      2,100 
  $ 4,000    $ 3,600 
  Liabilities and Shareholders’ Equity            
Current liabilities $ 1,100    $ 850 
Bonds payable   1,400      1,400 
Paid-in capital   600      600 
Retained earnings   900      750 
  $ 4,000    $ 3,600 

Calculate the following ratios for 2018.

  
1. Inventory turnover ratio 6,300 ÷ [($800 + 600) ÷ 2] = 9.00

2. Average days in inventory 365 ÷ 9.00 = 40.56 days

3. Receivables turnover ratio 9,000 ÷ [($600 + 400) ÷ 2] = 18.00

4. Average collection period 365 ÷ 18.00 = 20.28 days

5. Asset turnover ratio 9,000 ÷ [($4,000 + 3,600) ÷ 2] = 2.37

6. Profit margin on sales 300 ÷ $9,000 = 3.33%

7. Return on assets 300 ÷ [($4,000 + 3,600) ÷ 2] = 7.89% or: 3.33% × 2.37 times = 7.89%

8. Return on shareholders’ equity $ 300 ÷ [($1,500 + 1,350) ÷ 2] = 21.05%

9. Equity multiplier [($4,000 + 3,600) ÷ 2] ÷ [($1,500 + 1,350) ÷ 2] = 2.67

10. DuPont framework 3.33% × 2.37 × 2.67 = 21.05%

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F.
ALEXIAN SYSTEMS, INC.  
Income Statement  
for the Year Ended December 31, 2016  
($ in millions, except earnings per share)  
     
Revenues and gains:    
Net sales $ 425  
Interest 3  
Other income 126  
Total revenues and gains 554  
Expenses:    
Cost of goods sold 270  
Selling and administrative 154  
Income taxes 52  
Total expenses 476  
Net income $ 78  
Earnings per share $ 3.90  
     
Additional information ($ in millions):    
Selling and administrative expenses include    
restructuring costs $ 26  
Other income from a discontinued operation. $ 120  
Other income gain from sale of investments $ 6  
Cost of goods sold increase to correct    
error in 2015 ending inventory $ 5  

Prepare a revised income statement for 2018 reflecting the additional facts. Use a multiple-step format. Assume that
an income tax rate of 40% applies to all income statement items, and that 20 million shares of common stock were
outstanding throughout the year