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Chapter 4 Solutions - CHAPTER 4 Income Statement and...

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CHAPTER 4 Income Statement and Related Information 4-1
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EXERCISE 4-6 (30–40 minutes) (a) Multiple-Step Form Whitney Houston Shoe Co. Income Statement For the Year Ended December 31, 2007 Net sales ........................................................ $980,000 Cost of goods sold ....................................... 496,000 Gross profit on sales ................................... 484,000 Operating Expenses Selling expenses Wages and salaries .......................... $114,800 Depr. exp. (70% X $65,000) .............. 45,500 Materials and supplies ..................... 17,600 $177,900 Administrative expenses Wages and salaries .......................... 135,900 Other admin. expenses .................... 51,700 Depr. exp. (30% X $65,000) .............. 19,500 207,100 385,000 Income from operations .............................. 99,000 Other Revenues and Gains Rental revenue ........................................ 29,000 128,000 Other Expenses and Losses Interest expense ..................................... 18,000 Income before income tax ........................... 110,000 Income tax ............................................... 37,400 Net income .................................................... $ 72,600 Earnings per share ($72,600 ÷ 20,000) ....... $3.63 4-2
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EXERCISE 4-6 (Continued) (b) Single-Step Form Whitney Houston Shoe Co. Income Statement For the Year Ended December 31, 2007 Revenues Net sales ......................................................................... $ 980,000 Rental revenue ............................................................... 29,000 Total revenues ......................................................... 1,009,000 Expenses Cost of goods sold ........................................................ 496,000 Selling expenses ............................................................ 177,900 Administrative expenses .............................................. 207,100 Interest expense ............................................................ 18,000 Total expenses ......................................................... 899,000 Income before income tax .................................................. 110,000 Income tax ...................................................................... 37,400 Net income ............................................................................ $ 72,600 Earnings per share ($72,600 ÷ 20,000) .............................. $3.63 Note: An alternative income statement format for the single-step form is to show income tax as part of expense, and not as a separate item. (c) Single-step: 1. Simplicity and conciseness. 2. Probably better understood by users. 3. Emphasis on total costs and expenses and net income. 4. Does not imply priority of one revenue or expense over another. 4-3
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EXERCISE 4-6 (Continued) Multiple-step: 1. Provides more information through segregation of operating and nonoperating items. 2. Expenses are matched with related revenue. 4-4
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EXERCISE 4-10 (20–25 minutes) Spock Corporation Income Statement For the Year Ended December 31, 2007 Net sales (a) ................................................................ $4,162,000 Cost of goods sold (b) ............................................... 2,665,000 Gross profit ....................................................... 1,497,000 Selling expenses (c) .................................................. $636,000 Administrative expenses (d) ..................................... 491,000 1,127,000 Income from operations ................................... 370,000 Other revenue .......................................................... 240,000 Other expense ......................................................... (176,000) 64,000 Income before income tax ..................................... 434,000 Income tax ($434,000 X .34) ............................. 147,560 Income before extraordinary item ......................... 286,440 Extraordinary loss .................................................. $ 70,000 Less: Applicable income tax ........................... 23,800 46,200 Net income ............................................................... $ 240,240 Earnings per share ($900,000 ÷ $10 par value = 90,000 shares) Income before extraordinary item ($286,440 ÷ 90,000) ......... $3.18* Extraordinary item, net of tax .................................................. (.51 )* Net income ................................................................................. $2.67 *Rounded Supporting computations (a) Net sales: $4,275,000 – $34,000 – $79,000 = $4,162,000 (b) Cost of goods sold: $535,000 + ($2,786,000 + $72,000 – $27,000 – $15,000) – $686,000 = $2,665,000 (c) Selling expenses: $284,000 + $83,000 + $69,000 + $54,000 + $93,000 + $36,000 + $17,000 = $636,000 (d)
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