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CHAPTER 4
INCOME STATEMENT AND RELATED INFORMATION

CHAPTER LEARNING OBJECTIVES
1.
Understand the uses and limitations of an income statement.
2.
Understand the content and format of the income statement.
3.
Prepare an income statement.
4.
Explain how to report items in the income statement.
5.
Identify where to report earnings per share information.
6.
Explain intraperiod tax allocation.
7.
Understand the reporting of accounting changes and errors.
8.
Prepare a retained earnings statement.
9.
Explain how to report other comprehensive income.
4-2
Test Bank to accompany Intermediate Accounting: IFRS Edition
TRUE-FALSEConceptual
1. The income statement is useful for helping to assess the risk or uncertainty of achieving
future cash flows.
2. A strength of the income statement as compared to the statement of financial position is that
items that cannot be measured reliably can be reported in the income statement.
3. Earnings management generally makes income statement information more useful for
predicting future earnings and cash flows.
4. The transaction approach of income measurement focuses on the income-related activities
that have occurred during the period.
5. Income from operations represents a companys results before any gain or loss on
discontinued operations.
6. Both revenues and gains increase both net income and equity.
7. Companies frequently report income tax as the last item before net income on the income
statement.
8. The income statement presents subtotals for gross profit, income before continuing
operations, income before income tax, and net income.
9. The nature-of-expense method identifies the major cost drivers and helps users to assess
whether these amounts are appropriate for the revenue generated.
10. Income before income taxes is computed by deducting interest expense from income from
operations.
11. The IASB takes the position that both revenues and expenses and other income and
expense should be reported as part of income from operations.
12. Companies report the results of operations of a component of a business that will be
disposed of separately from continuing operations.
13. Discontinued operations and gains and losses are both reported net of tax in the income
statement.
14. A company that reports a discontinued operation has the option of reporting per share
amounts for this item.
15. Intraperiod tax allocation relates the income tax expense of the period to the specific items
that give rise to the amount of the tax provision.
16. A company recognizes a change in estimate by making a retrospective adjustment to the
financial statements.
17. Prior period adjustments can either be added or subtracted in the Retained Earnings
Statement.
Income Statement and Related Information
4-3
18. Companies only restrict retained earnings to comply with contractual requirements or
current necessity.
19. Comprehensive income includes all changes in equity during a period except those resulting
from distributions to owners.
20. Comprehensive income can be reported in a statement of changes in equity.
True False AnswersConceptual

Item
1.
2.
3.
4.
5.
Ans.
T
F
F
T
F
Item
6.
7.
8.
9.
10.
Ans.
T
T
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
T
T
F
F
T
Item
16.
17.
18.
19.
20.
Ans.
F
T
F
F
T
MULTIPLE CHOICEConceptual
21.
The major elements of the income statement are

a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations and cumulative
effect.
c. revenues, expenses, gains, and losses.
d. All of these.
22.
Information in the income statement helps users to

a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. All of these.
23.
Limitations of the income statement include all of the following except

a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.
24.
Which of the following would represent the least likely use of an income statement
prepared for a business enterprise?
a. Use by customers to determine a company's ability to provide needed goods and
services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.
4-4
S
25.
The income statement reveals

a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
26.
The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of a company.
b. Evaluate the solvency of a company.
c. Estimate future cash flows.
d. Estimate future financial flexibility.
27.
Which of the following is an example of managing earnings down?

a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.
28.
Which of the following is an example of managing earnings up?

a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.
29.
What might a manager do during the last quarter of a fiscal year if she wanted to improve
current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.
30.
What might a manager do during the last quarter of a fiscal year if she wanted to decrease
current annual net income?
a. Delay shipments to customers until after the end of the fiscal year.
b. Relax credit policies for customers.
c. Pay suppliers all amounts owed.
d. Delay purchases from suppliers until after the end of the fiscal year.
31.
The income statement provides investors and creditors information that helps them predict
a. the amounts of future cash flows.
b. the timing of future cash flows.
c. the uncertainty of future cash flows.
d. All of these answers are correct.
32.
Investors and creditors use income statement information for each of the following
except to
a. evaluate the future performance of the company.
b. provide a basis for predicting future performance.
c. help assess the risk and uncertainty of achieving future cash flows.
4-5
33.
The planned timing of revenues, expenses, gains, and losses to smooth out bumps in
earnings is the definition of
a. quality of earnings.
b. earnings management.
c. smoothing of earnings.
d. earnings averaging.
34.
Which of the following situations involving different accounting methods or accounting

estimates results in comparison difficulties between companies?
a. Estimated useful lives for depreciable assets.
b. Inventory methods.
c. Estimates of bad debts.
d. All of the above.
35.
Which method of income measurement is used in the preparation of the income

statement?
a. Capital maintenance approach.
b. Transaction approach.
c. Cash-flow approach.
d. Income components approach.
36.
Which of the following equations expresses the definition of income?

a. Income = Revenues Expenses
b. Income = (Revenues + Gains) (Expenses + Losses)
c. Income = Revenues + Gains
d. Income = Gains Losses
37.
Which of the following is not required to be presented on the income statement

under IFRS?
a. Revenue.
b. Other gains/losses.
c. Finance costs.
d. Tax expense.
38.
The non-controlling interest section of the income statement is shown

a. below net income.
b. below income from operations.
c. above other income and expenses.
d. above income tax.
39.
The definition of expenses includes

a. losses only.
b. expenses and losses.
c. expenses only.
d. expenses, losses and unrealized losses on available-for-sale securities.
4-6
40.

IFRS requires that a single amount be disclosed within the income statement for
a. the post-tax profit/loss on discontinued operations and the pre-tax gain/loss
disposal of discontinued operational assets.
b. the pre-tax profit/loss on discontinued operations and the post-tax gain/loss
c. the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss
d. the post-tax profit/loss on discontinued operations and the post-tax gain/loss
on the
on the
on the
on the
41.
Which of the following is not a generally practiced method of presenting the income
statement?
a. Including prior period adjustments in determining net income.
b. The condensed income statement.
c. The consolidated income statement.
d. Including gains and losses from discontinued operations of a component of a business
in determining net income.
42.
The occurrence which most likely would have no effect on 2015 net income (assuming
that all amounts involved are material) is the
a. sale in 2015 of an office building contributed by a stockholder in 1987.
b. collection in 2015 of a receivable from a customer whose account was written off in
2014 by a charge to the allowance account.
c. settlement based on litigation in 2015 of previously unrecognized damages from a
serious accident which occurred in 2013.
d. worthlessness determined in 2015 of stock purchased on a speculative basis in 2011.
43.
The occurrence that most likely would have no effect on 2015 net income is the
a. sale in 2015 of an office building contributed by a stockholder in 1966.
b. collection in 2015 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period discovered
subsequent to their issuance.
d. stock purchased in 2001 deemed worthless in 2015.
44. Which of the following is not a selling expense?

a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.
45.
The accountant for the Lintz Sales Company is preparing the income statement for 2015
and the statement of financial position at December 31, 2015. The January 1, 2015,
merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.
4-7
46.
In which section of the income statement is interest expense reported?

a. Gross profit.
b. Income from operations.
c. Income before income taxes.
d. Non-controlling interest.
47.
If a company prepares a consolidated income statement, IFRS requires that net income
be reported for
a. the majority interest only.
b. the minority interest only.
c. both the majority interest and the minority interest.
d. as a single amount only.
48.
Earnings per share relate to

a. preference shares only.
b. ordinary shares only.
c. both preference and ordinary shares.
d. neither preference nor ordinary shares.
49.
Undeclared dividends are deducted from net income in the earnings per share
computation for which type of preference shares?
a. Non-cumulative only.
b. Cumulative only.
c. Neither non-cumulative nor cumulative.
d. Both non-cumulative and cumulative.
50.
The earnings per share computation is not required for

a. Net income.
b. Gain on disposal of discontinued operation, net of tax.
c. Income from continuing operations.
d. Income from operations.
51.
Given the following income statement line items:

Income from operations
Income before income taxes
Income from continuing operations
Income from discontinued operations
Net income
How many earnings per share amounts are required to be disclosed?
a. 5
b. 4
c. 3
d. 2
52.
Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
4-8
S
53.
Earnings per share should always be shown separately for

a. net income and gross profit.
b. net income and pretax income.
c. income from continuing operations.
d. discontinued operations and prior period adjustments.
54.
Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an other income item.
b. Results of operations of a discontinued component should be disclosed immediately
below income from operations.
c. Earnings per share from both continuing operations and net income should be
disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together
with the results of continuing operations.
55.
When a company discontinues an operation and disposes of the discontinued operation

(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.
b. an other income and expense item.
c. an amount after continuing operations and before net income.
d. a bulk sale of plant assets included in income from continuing operations.
56.
Gains or losses on the disposal of investments should be shown in the income statement
a.
b.
c.
d.
Net of Tax
No
Yes
No
Yes
Disclosed Separately
No
Yes
Yes
No
57.
Income taxes are allocated to

a. continuing operations.
b. discontinued operations.
c. prior period adjustments.
58.
Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement
either before or after they are included in the tax return.
b. It is required for the cumulative effect of accounting changes but not for prior period
adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting
periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of
tax.
4-9
59.
Companies use intraperiod tax allocation for all of the following items except
a. discontinued operations.
b. prior period adjustments.
c. changes in accounting estimates.
d. income from continuing operations.
60.
A change in accounting principle requires what kind of adjustment to the financial

statements?
a. Current period adjustment.
b. Prospective adjustment.
c. Retrospective adjustment.
d. Current and prospective adjustment.
61.
A change in accounting principle requires that the cumulative effect of the change for prior
periods be shown as an adjustment to
a. beginning retained earnings for the earliest period presented.
b. net income for the period in which the change occurred.
c. comprehensive income for the earliest period presented.
d. stockholders equity for the period in which the change occurred.
62.
Changes in estimates affect reported amounts

a. retrospectively only.
b. prospectively only.
c. currently and prospectively.
d. currently and retrospectively.
63.
Prior years income statements are not restated for

a. changes in accounting principle.
b. changes in estimates.
c. corrections of errors.
d. All of these answer choices are correct.
64.
In 2015, Milford Corporation determined that it overstated salaries payable and salaries
expense by $20,000 in 2014. In 2015, which of the following accounts will have to be
credited to correct this error?
a. Salaries and Wages Payable.
b. Salaries and Wages Expense.
c. Retained Earnings.
d. Income Summary.
65.
Which of the following does not appear on a statement of retained earnings?

a. Net loss.
b. Prior period adjustments.
c. Preference share dividends.
d. Other comprehensive income.
66.
Which of the following would appear first in a statement of retained earnings?

a. Net income.
b. Prior period adjustment.
c. Cash dividends.
d. Share dividends.
4 - 10
P
67.

A correction of an error in prior periods' income will be reported
a.
b.
c.
d.
In the income statement

Yes
No
Yes
No
Net of tax
Yes
No
No
Yes
68.
Which of the following items will not appear in the retained earnings statement?
a. Net loss.
b. Prior period adjustment.
c. Discontinued operations.
d. Dividends.
69.
Watts Corporation made a very large arithmetical error in the preparation of its year-end
financial statements by improper placement of a decimal point in the calculation of
depreciation. The error caused the net income to be reported at almost double the proper
amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately
listed on the income statement and fully explained in a note to the financial
statements.
c. an other expense item for the year in which the error was made.
d. a prior period adjustment.
70.
Which of the following is included in comprehensive income?

a. Investments by owners.
b. Unrealized gains on non-trading equity securities.
c. Distributions to owners.
d. Changes in accounting principles.
71.
Which of the following is not an acceptable way of displaying the components of other
comprehensive income?
a. Combined statement of retained earnings.
b. Second income statement.
c. Combined statement of comprehensive income.
d. All of the above are acceptable.
72.
Comprehensive income includes all of the following except

a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
73.
Comprehensive income includes all of the following, except

a. revenues and gains.
b. expenses and losses.
c. preference share dividends.
d. unrealized gains and losses on non-trading equity securities.

74.
4 - 11
Under IFRS other comprehensive income must be displayed (reported) in

a. the equity section of the statement of financial position.
b. a second income statement.
c. the comprehensive income statement or the income statement and comprehensive
income statement.
d. the retained earnings the statement.
Multiple Choice AnswersConceptual

Item
Ans.
21.
22.
23.
24.
25.
26.
27.
28.
c
d
b
d
d
c
b
c
Item
29.
30.
31.
32.
33.
34.
35.
36.
Ans.
b
a
d
a
b
d
b
c
Item
37.
38.
39.
40.
41.
42.
43.
44.
Ans.
b
a
b
d
a
b
c
b
Item
45.
46.
47.
48.
49.
50.
51.
52.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
b
c
c
b
b
d
c
d
53.
54.
55.
56.
57.
58.
59.
60.
c
c
c
c
d
d
c
c
61.
62.
63.
64.
65.
66.
67.
68.
a
c
b
c
d
b
d
c
69.
70.
71.
72.
73.
74.
d
b
a
c
c
b
MULTIPLE CHOICEComputational
75.
Ortiz Co. had the following account balances:

Sales revenue
$ 120,000
Cost of goods sold
60,000
Salaries and wages expense
10,000
Depreciation expense
20,000
Dividend revenue
4,000
Utilities expense
8,000
Rent revenue
25,000
Interest expense
12,000
Sales returns
11,000
Advertising expense
13,000
What amount would Ortiz report as other income and expense in its income statement?
a.
b.
c.
d.
$29,000
$17,000
$25,000
$13,000
4 - 12
76.

Ortiz Co. had the following account balances:
Sales revenue
$ 180,000
Cost of goods sold
90,000
15,000
30,000
Dividend revenue
6,000
Utilities expense
12,000
Rent revenue
30,000
Interest expense
18,000
Sales returns
16,500
Advertising expense
19,500
What amount would Ortiz report as income from operations in its income statement?
a.
b.
c.
d.
77.
$73,500
$45,000
$33,000
$15,000
For Mortenson Company, the following information is available:

Cost of goods sold
Sales discounts
Income tax expense
Operating expenses
Sales revenue
$240,000
8,000
24,000
92,000
400,000
In Mortensons income statement, gross profit

a. should not be reported.
b. should be reported at $36,000.
c. should be reported at $152,000.
d. should be reported at $160,000.
78.
For Rondelli Company, the following information is available:

Cost of goods sold
Sales returns and allowances
Income tax expense
Operating expenses
Sales revenue
$270,000
12,000
27,000
105,000
450,000
In Rondelli's income statement, gross profit

a. should not be reported.
b. should be reported at $36,000.
c. should be reported at $168,000.
d. should be reported at $180,000.
79.
Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $13,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $13,720,000.
b. $13,350,000.
c. $13,175,000.
d. $13,035,000.

80.
Use the following information (in thousands):

Service Revenue
1,600,000
200,000
Net Income
180,000
440,000
Selling & administrative expenses
1,000,000
Income before income tax
400,000
Determine the amount of other income and expense.
a. 40,000
b. 160,000
c. 200,000
d. 20,000
81.

Service Revenue
1,600,000
200,000
Net Income
180,000
440,000
1,000,000
400,000
Determine the amount of financing costs.
a. 40,000
b. 20,000
c. 200,000
d. 160,000
82.

Service Revenue
1,600,000
200,000
Net Income
180,000
440,000
1,000,000
400,000
Determine the amount of income tax.
a. 40,000
b. 20,000
c. 200,000
d. 160,000
4 - 13
4 - 14
83.

Revenues
1,600,000
200,000
Net Income
180,000
440,000
1,000,000
400,000
Determine the amount of discontinued operations.
a. (40,000)
b. 160,000
c. 200,000
d. (20,000)
84.

Sales revenue
Gain on sale of equipment
Cost of goods sold
Interest expense
Income tax rate
300,000
90,000
164,000
16,000
30,000
30%
Determine the amount of income from operations.

a. 76,000
b. 196,000
c. 60,000
d. 180,000
85.

Sales revenue
Cost of goods sold
Interest expense
Income tax rate
300,000
90,000
164,000
16,000
30,000
30%
Determine the amount of income before taxes.

a. 76,000
b. 196,000
c. 60,000
d. 180,000

86.
4 - 15

Sales revenue
Cost of goods sold
Interest expense
Income tax rate
300,000
90,000
164,000
16,000
30,000
30%
Determine the amount of income taxes.

a. 8,000
b. 18,000
c. 27,000
d. 54,000
87.

Sales revenue
Cost of goods sold
Interest expense
Income tax rate
300,000
90,000
164,000
16,000
30,000
30%
Determine the amount of net income.

a. 126,000
b. 21,000
c. 42,000
d. 63,000
88.
Majors Corporation had income from continuing operations of $1,800,000 in 2015. During
2015 it disposed of its repair division at a pre-tax gain of $27,000. Prior to disposal, the
division operated at a pre-tax loss of $45,000. The tax rate was 30%. What is the net
income for 2015?
a. $1,782,000
b. $1,728,000
c. $1,749,600
d. $1,787,400
89.
Manning Company has the following items: write-down of inventories, $240,000; loss on
disposal of part of Sports Division, $370,000; and loss on restructurings, $226,000.
Ignoring income taxes, what total amount should Manning Company report as other
income and expense?
a. $836,000
b. $370,000
c. $466,000
d. $596,000
4 - 16
90.
Garwood Company has the following items: write-down of inventories, $480,000; loss on
disposal of part of Sports Division, $740,000; and loss due to an asset impairment,
$452,000. Ignoring income taxes, what total amount should Garwood Company report as
other income and expense?
a. $1,672,000
b. $740,000
c. $932,000
d. $1,192,000
91.
At Ruth Company, events and transactions during 2015 included the following. The tax
rate for all items is 30%.
(1) Depreciation for 2013 was found to be understated by $45,000.
(2) A litigation settlement resulted in a loss of $37,500.
(3) The inventory at December 31, 2013 was overstated by $60,000.
(4) The company disposed of its recreational division at a loss of $750,000.
The effect of these events and transactions on 2015 income from continuing operations
net of tax would be
a. $26,250.
b. $57,750.
c. $99,750.
d. $624,750.
92.
At Ruth Company, events and transactions during 2015 included the following. The tax
rate for all items is 30%.
(1) Depreciation for 2013 was found to be understated by $45,000.
(2) A litigation settlement resulted in a loss of $37,500.
(3) The inventory at December 31, 2013 was overstated by $60,000.
(4) The company disposed of its recreational division at a loss of $750,000.
The effect of these events and transactions on 2015 net income net of tax would be
a. $26,250.
b. $551,250.
c. $582,750.
d. $624,750.
93.
During 2015, Lopez Corporation disposed of Pine Division, a major component of its
business. Lopez realized a gain of $1,500,000, net of taxes, on the sale of Pine's assets.
Pine's operating losses, net of taxes, were $1,800,000 in 2015. How should these facts be
reported in Lopez's income statement for 2015?
a.
b.
c.
d.
Total Amount to be Included in

Income from
Results of
Continuing Operations
Discontinued Operations
$1,800,000 loss
$1,500,000 gain
300,000 loss
0
0
300,000 loss
1,500,000 gain
1,800,000 loss

94.
In 2015, Esther Corporation reported net income of $1,000,000. It declared and paid
preference dividends of $250,000 and ordinary share dividends of $100,000. During 2015,
Esther had a weighted average of 250,000 ordinary shares outstanding. Compute
Esther's 2015 earnings per share.
a.
b.
c.
d.
95.
$1.50
$1.75
$2.25
$2.50
In 2015, Benfer Corporation reported net income of $350,000. It declared and paid
ordinary share dividends of $40,000 and had a weighted average of 100,000 ordinary
shares outstanding. Compute the earnings per share to the nearest cent.
a.
b.
c.
d.
97.
$2.60
$3.00
$4.00
$5.00
In 2015, Linz Corporation reported a discontinued operations loss of $1,000,000, net of

tax. It declared and paid preference dividends of $100,000 and ordinary share dividends
of $300,000. During 2015, Linz had a weighted average of 400,000 ordinary shares
outstanding. Compute the effect of the discontinued operations loss, net of tax, on earnings per
share.
a.
b.
c.
d.
96.
$3.10
$2.45
$3.15
$3.50
Benedict Corporation reports the following information:

Net income
Dividends on ordinary shares
Dividends on preference shares
Weighted average ordinary shares outstanding
$500,000
140,000
60,000
125,000
Benedict should report earnings per share of

a. $2.40.
b. $2.88.
c. $3.52.
d. $4.00.
98.
4 - 17
Norling Corporation reports the following information:

Net income
Dividends on ordinary shares
Dividends on preference shares
Norling should report earnings per share of
a. $1.20.
b. $1.44.
c. $1.76.
d. $2.00.
$500,000
140,000
60,000
250,000
4 - 18
99.

In 2015, Timmons Company reported net income of 1,000,000. It declared and paid
preference share dividends of 100,000 and ordinary share dividends of 125,000. During
2015, Timmons had a weighted average of 150,000 ordinary shares outstanding. The
2015 earning per share for Timmons Company is:.
a.
b.
c.
d.
100.
6.67
6.00
5.83
5.17
Given the following:

Net income
EPS
Dividend/ordinary shares
$800,000
4.25
2.00
160,000
Determine the amount of the preference share dividend.

a. $480,000
b. $320,000
c. $160,000
d. $120,000
101.
Use the following information:

Gross profit
Loss on sale of investments
Interest expense
Gain on sale of discontinued operations
Income tax rate
3,900,000
10,000
7,500
30,000
20%
Compute the amount of income tax applicable to continuing operations.

a. 776,500
b. 820,000
c. 784,500
d. 784,000
102.

Gross profit
Interest expense
Income tax rate
3,900,000
10,000
7,500
30,000
20%
Compute the amount of discontinued operations to be combined with income from

continuing operations on the income statement.
a. 30,000
b. 24,000
c. 6,000
d. None of the above.

103.
4 - 19

Gross profit
Interest expense
Income tax rate
3,900,000
10,000
7,500
30,000
20%
Compute the total amount of income tax expense experienced by the company.
a. 765,000
b. 800,000
c. 782,500
d. 1,005,000
104.
Sandstrom Corporation has a discontinued operations loss of $100,000, an unusual gain

of $70,000, and a tax rate of 40%. At what amount should Sandstrom report each item?
a.
b.
c.
d.
105.
Unusual gain
$70,000
42,000
70,000
42,000
Prophet Corporation has a discontinued operations loss of $300,000, an unusual gain of

$210,000, and a tax rate of 40%. At what amount should Prophet report each item?
a.
b.
c.
d.
106.
Discontinued loss
$(100,000)
(100,000)
(60,000)
(60,000)
Discontinued loss
$(300,000)
(300,000)
(180,000)
(180,000)
Unusual gain
$210,000
126,000
210,000
126,000
Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of
$262,000. It also has the following items (gross amounts).
Unusual loss
Discontinued operations loss
Gain on disposal of equipment
Change in accounting principle
increasing prior year's income
$ 37,000
101,000
8,000
53,000
What is the amount of income tax expense Arreaga would report on its income statement?
a. $104,800
b. $93,200
c. $111,200
d. $74,000
4 - 20
107.

Palomo Corp has a tax rate of 30 percent and income before considering the items below
of $377,000. It also has the following items (gross amounts).
Unusual gain
Loss from discontinued operations
Dividend revenue
Income increasing prior
period adjustment
$ 23,000
183,000
6,000
74,000
What is the amount of income tax Palomo would report on its income statement?
a. $121,800
b. $ 66,900
c. $ 89,100
d. $114,900
108.
Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what
would be the income tax expense reported on the face of the income statement?
Sales revenue
$ 110,000
Cost of goods sold
60,000
8,000
11,000
Dividend revenue
9,000
Utilities expense
1,000
Loss from discontinued operations
10,000
Interest expense
2,000
a.
b.
c.
d.
109.
$14,800
$10,800
$11,200
$ 7,200
Moorman Corporation reports the following information:

Correction of understatement of depreciation expense
in prior years, net of tax
$ 430,000
Dividends declared, 2015
320,000
Net income for 2015
1,000,000
Retained earnings, 1/1/15, as reported
2,500,000
Moorman should report retained earnings, January 1, 2015, as adjusted at
a. $2,070,000.
b. $2,500,000.
c. $2,930,000.
d. $3,610,000.

110.
Moorman Corporation reports the following information:

Correction of understatement of depreciation expense
$ 430,000
320,000
Net income for 2015
1,000,000
2,500,000
Moorman should report retained earnings, December 31, 2015, of
a. $2,070,000.
b. $2,750,000.
c. $3,180,000.
d. $3,610,000.
111.
Leonard Corporation reports the following information:

Correction of overstatement of depreciation expense
$ 215,000
160,000
Net income for 2015
500,000
1,200,000
Leonard should report retained earnings, January 1, 2015, as adjusted at
a. $985,000.
b. $1,200,000.
c. $1,415,000.
d. $1,755,000.
112.
Leonard Corporation reports the following information:

Correction of overstatement of depreciation expense
$ 215,000
160,000
Net income for 2015
500,000
1,200,000
Leonard should report retained earnings, December 31, 2015, at
a. $985,000.
b. $1,325,000.
c. $1,540,000.
d. $1,755,000.
4 - 21
4 - 22
113.

The following information was extracted from the accounts of Essex Corporation at
December 31, 2015:
CR(DR)
Total reported income since incorporation
$1,900,000
Total cash dividends paid
(800,000)
Unrealized holding loss
(120,000)
Total share dividends distributed
(200,000)
Prior period adjustment, recorded January 1, 2015
75,000
What should be the balance of retained earnings at December 31, 2015?
a. $855,000
b. $900,000
c. $780,000
d. $975,000
114.
Pullman Corporation had retained earnings of $2,100,000 at January 1, 2015. During the
year the company experienced a net loss of $900,000 and declared cash dividends of
$240,000. Determine the retained earnings balance at December 31, 2015.
a.
b.
c.
d.
115.
Pullman Corporation had retained earnings of $2,100,000 at January 1, 2015. During the
year the company experienced a net loss of $900,000 and declared cash dividends of
$240,000. It was discovered in 2015 that $150,000 of repair expense was debited to the
Land account in 2014. The income tax rate is 20%. Determine the retained earnings
balance at December 31, 2015.
a.
b.
c.
d.
116.
$2,760,000
$1,200,000
$3,000,000
$960,000
$810,000
$1,080,000
$1,050,000
$840,000
Rodriquez Corporation had retained earnings of $850,000 at January 1, 2015. During the
year the company generated a net income of $150,000 and declared share dividends of
$50,000. It was discovered during 2015 that $40,000 of closing costs on a 2014 purchase
of land was debited to Maintenance Expense. The income tax rate is 30%. Determine the
retained earnings balance at December 31, 2015.
a.
b.
c.
d.
$978,000
$960,000
$910,000
$938,000

117.
4 - 23
On January 1, 2015, Zhang Inc. had cash and share capital of 10,000,000. At that date,
the company had no other asset, liability, or equity balances. On January 5, 2015, it
purchased for cash 6,000,000 of equity securities that it classified as non-trading. It
received cash dividends of 800,000 during the year on these securities. In addition, it has
an unrealized loss on these securities of 600,000. The tax rate is 20%.
Compute the amount of net income/(loss).
a.
b.
c.
d.
118.
800,000
640,000
(200,000)
160,000
Compute the amount of comprehensive income.
a.
b.
c.
d.
119.
200,000
160,000
640,000
600,000
Compute the amount of other comprehensive income/(loss).
a.
b.
c.
d.
120.
(480,000)
(600,000)
200,000
160,000
Compute the amount of accumulated other comprehensive income/(loss).
a.
b.
c.
d.
(600,000)
200,000
160,000
(480,000)
4 - 24
121.

Madsen Company reported the following information for 2015:
Sales revenue
Cost of goods sold
Operating expenses
Unrealized holding gain on available-for-sale securities
Cash dividends received on the securities
$510,000
350,000
55,000
30,000
2,000
For 2015, Madsen would report other comprehensive income of

a. $137,000.
b. $135,000.
c. $32,000.
d. $30,000.
122.
Korte Company reported the following information for 2015:

Sales revenue
Cost of goods sold
Operating expenses
Unrealized holding gain on available-for-sale securities
Cash dividends received on the securities
$500,000
350,000
55,000
25,000
2,000
For 2015, Korte would report comprehensive income of

a. $122,000.
b. $120,000.
c. $97,000.
d. $25,000.
123.
For the year ended December 31, 2015, Transformers Inc. reported the following:
Net income
Preference dividends declared
Ordinary share dividends declared
Unrealized holding loss, net of tax
Retained earnings
Share capital ordinary
Accumulated other comprehensive income,
Beginning balance
$120,000
20,000
4,000
2,000
160,000
80,000
10,000
What would Transformers report as its ending balance of Accumulated Other

Comprehensive Income?
a.
b.
c.
d.
$12,000
$10,000
$8,000
$2,000

124.
Net income
Retained earnings, beginning balance
Beginning balance
$120,000
20,000
4,000
2,000
160,000
80,000
10,000
What would Transformers report as the ending balance of Retained Earnings?

a.
b.
c.
d.
125.
$278,000
$266,000
$256,000
$254,000
Net income
Retained earnings, beginning balance
Beginning balance
$120,000
20,000
4,000
2,000
160,000
80,000
10,000
What would Transformers report as total stockholders' equity?

a.
b.
c.
d.
$344,000
$336,000
$256,000
$240,000
Multiple Choice AnswersComputational

Item
75.
76.
77.
78.
79.
80.
81.
82.
83.
Ans.
a
c
c
c
c
b
a
c
d
Item
84.
85.
86.
87.
88.
89.
90.
91.
92.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
b
d
d
a
d
a
a
a
b
93.
94.
95.
96.
97.
98.
99.
100.
101
c
b
d
d
c
c
b
d
a
102.
103.
104.
105.
106.
107.
108.
109.
110.
b
c
c
c
b
a
a
a
b
111.
112.
113.
114.
115.
116.
117.
118.
119.
c
d
d
d
d
a
b
b
a
120.
121.
122.
123.
124.
125.
d
d
a
c
c
a
4 - 25
4 - 26
MULTIPLE CHOICECPA Adapted

126.
Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2015, included the following
expense accounts:
Accounting and legal fees
Advertising
Freight-out
Interest
Loss on sale of long-term investments
Officers' salaries
Rent for office space
Sales salaries and commissions
$140,000
100,000
75,000
60,000
30,000
170,000
180,000
110,000
One-half of the rented premises is occupied by the sales department.

How much of the expenses listed above should be included in Perry's selling expenses for
2015?
a. $210,000
b. $285,000
c. $300,000
d. $375,000
127.
Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2015, included the following
expense accounts:
Advertising
Freight-out
Interest
Loss on sale of long-term investments
Officers' salaries
$140,000
100,000
75,000
60,000
30,000
170,000
180,000
110,000
One-half of the rented premises is occupied by the sales department.

How much of the expenses listed above should be included in Perry's general and
administrative expenses for 2015?
a. $400,000
b. $430,000
c. $460,000
d. $490,000

128.
4 - 27
Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2015 included the following
expense and loss accounts:
Advertising
Freight-out
Interest
Loss on sale of long-term investment
Officers' salaries
$140,000
160,000
80,000
70,000
30,000
225,000
220,000
170,000
One-half of the rented premises is occupied by the sales department. Didde's total selling
expenses for 2015 are
a. $520,000.
b. $440,000.
c. $410,000.
d. $350,000.
129.
The following items were among those that were reported on Dye Co.'s income statement
for the year ended December 31, 2015:
Legal and audit fees
$150,000
180,000
Interest on bank loan
210,000
Loss on abandoned equipment used in operations
35,000
The office space is used equally by Dye's sales and accounting departments. What
amount of the above-listed items should be classified as general and administrative
expenses in Dye's income statement?
a. $240,000
b. $275,000
c. $330,000
d. $450,000
4 - 28
130.

Logan Corp.'s trial balance of income statement accounts for the year ended December
31, 2015 included the following:
Debit
Credit
Sales revenue
$140,000
Cost of sales
$ 60,000
Administrative expenses
25,000
Loss on sale of equipment
9,000
Commissions to salespersons
8,000
Interest revenue
5,000
Freight-out
3,000
Loss on disposition of wholesale division
17,000
Bad debt expense
3,000
Totals
$125,000
$145,000
Other information:
Logan's income tax rate is 30%. Merchandise inventory:
January 1, 2015
$80,000
December 31, 2015
70,000
On Logan's income statement for 2015, merchandise purchases are
a. $73,000.
b. $70,000.
c. $53,000.
d. $50,000.
131.
Debit
Credit
Sales revenue
$140,000
Cost of sales
$ 60,000
25,000
9,000
8,000
Interest revenue
5,000
Freight-out
3,000
17,000
Bad debt expense
3,000
Totals
$125,000
$145,000
Other information:
January 1, 2015
$80,000
December 31, 2015
70,000
On Logan's income statement for 2015, income from continuing operations is
a. $54,000.
b. $20,000.
c. $37,000.
d. $32,000.

132.
4 - 29
Debit
Credit
Sales revenue
$140,000
Cost of sales
$ 60,000
25,000
9,000
8,000
Interest revenue
5,000
Freight-out
3,000
17,000
Bad debt expense
3,000
Totals
$125,000
$145,000
Other information:
January 1, 2015
$80,000
December 31, 2015
70,000
On Logan's income statement for 2015, discontinued operations loss is
a. $11,900.
b. $17,000.
c. $18,200.
d. $26,000.
133.
Chase Corp. had the following infrequent transactions during 2015:

A $300,000 gain from selling its automotive division.
A $420,000 gain on the sale of investments.
A $140,000 loss on the write-down of inventories.
In its 2015 income statement, what amount should Chase report as other income and
expense?
a. $160,000
b. $280,000
c. $580,000
d. $720,000
134.
James, Inc. incurred the following infrequent losses during 2015:

A $105,000 impairment loss on intangible assets.
A $60,000 litigation settlement (loss).
A $90,000 write-off of obsolete inventory.
In its 2015 income statement, what amount should James report as other income and
expense?
a. $255,000
b. $195,000
c. $165,000
d. $150,000
4 - 30
135.

Which of the following should be reported as a prior period adjustment?
Change in Estimated Lives
of Depreciable Assets
a.
Yes
b.
No
c.
Yes
d.
No
Change from Unaccepted

Principle to Accepted Principle
Yes
Yes
No
No
Multiple Choice AnswersCPA Adapted

Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
126.
127.
d
a
128.
129.
a
a
130.
131.
d
c
132.
133.
a
b
134.
135.
a
b
DERIVATIONS Computational
No. Answer
Derivation
75.
$25,000 + $4,000 = $29,000.
76
$51,000 - $12,000 + $30,000 - $16,500 - $19,500 = $33,000.
77.
$400,000 $8,000 - $240,000 = $152,000.
78.
$450,000 $12,000 - $270,000 = $168,000.
79.
$13,720,000 $370,000 $175,000 = $13,175,000.
80.
1,600,000 1,000,000 440,000 = 160,000.
81.
440,000 400,000 = 40,000.
82.
400,000 200,000 = 200,000.
83.
200,000 180,000 = (20,000)
84.
300,000 164,000 30,000 + 90,000 = 196,000.
85.
300,000 164,000 30,000 + 90,000 16,000 = 180,000.
86.
300,000 164,000 30,000 + 90,000 16,000 = 180,000;

180,000 0.30 = 54,000.
87.
300,000 164,000 30,000 + 90,000 16,000 = 180,000;

180,000 54,000 = 126,000
88.
$1,800,000 [($45,000 $27,000) (($45,000 $27,000) 0.30)]

= $1,787,400.
No. Answer
4 - 31
Derivation
89.
$240,000 + $$370,000 + $226,000 = $836,000.
90.
$480,000 + $740,000 + $452,000 = $1,672,000.
91.
$37,500 $11,250 = $26,250.
92.
$26,250 + ($750,000 0.70) = $551,250.
93.
$1,800,000 $1,500,000 = $300,000.
94.
($1,000,000 $250,000) 250,000 sh. = $3.00.
95.
$1,000,000 400,000 sh. = $2.50.
96.
$350,000 100,000 sh. = $3.50.
97.
($500,000 $60,000) 125,000 = $3.52.
98.
($500,000 $60,000) 250,000 = $1.76.
99.
(1,000,000 100,000) 150,000 = 6.00.
100.
($800,000 X) 160,000 = $4.25.

$800,000 X = $680,000 = $120,000.
101.
(3,900,000 10,000 7,500) 0.20 = 776,500.
102.
30,000 (30,000 0.20) = 24,000.
103.
[(3,900,000 10,000 7,500) 0.20] + (30,000 0.20) = 782,500.
104.
$100,000 0.60 = $60,000.
105.
$300,000 0.60 = $180,000.
106.
($262,000 $37,000 + $8,000) 0.40 = $93,200.
107.
($377,000 + $23,000 + $6,000) 0.30 = $121,800.
108.
($110,000 $60,000 $8,000 $11,000 + $9,000 $1,000 $2,000) x

0.40 = $14,800.
109.
$2,500,000 $430,000 = $2,070,000.
110.
$2,500,000 $430,000 + $1,000,000 $320,000 = $2,750,000.
111.
$1,200,000 + $215,000 = $1,415,000.
112.
$1,200,000 + $215,000 + $500,000 $160,000 = $1,755,000.
4 - 32
No. Answer
Derivation
113.
$1,900,000 $800,000 $200,000 + $75,000 = $975,000.
114.
$2,100,000 $900,000 $240,000 = $960,000.
115.
$2,100,000 $900,000 $240,000 ($150,000 0.80) = $840,000.
116.
$850,000 + $150,000 $50,000 + ($40,000 0.70) = $978,000.
117.
800,000 (800,000 0.20) = 640,000.
118.
(800,000 600,000) = 200,000 0.80 = 160,000.
119.
600,000 (600,000 0.20) = 480,000
120.
600,000 (600,000 0.20) = 480,000
121.
Other comprehensive income = $30,000.
122.
$500,000 $350,000 $55,000 + $25,000 + $2,000 = $122,000.
123.
$10,000 $2,000 = $8,000.
124.
$160,000 + $120,000 - $20,000 $4,000 = $256,000.
125.
($160,000 + $120,000 $20,000 $4,000) + $80,000 + ($10,000 $2,000) =

$344,000.
4 - 33
DERIVATIONS CPA Adapted

No. Answer
Derivation
126.
$100,000 + $75,000 + $110,000 + $90,000 = $375,000.
127.
$140,000 + $170,000 + $90,000 = $400,000.
128.
$160,000 + $80,000 + $110,000 + $170,000 = $520,000.
129.
$150,000 + $90,000 = $240,000.
130.
$60,000 + $70,000 $80,000 = $50,000.
131.
$140,000 $60,000 $25,000 $9,000 $8,000 + $5,000 $3,000

$3,000 = $37,000.
132.
$17,000 0.70 = $11,900.
133.
$420,000 $140,000 = $280,000.
134.
$105,000 + $60,000 + $90,000 = $255,000.
135.
Conceptual.
4 - 34
EXERCISES
Ex. 4-136Definitions.
Provide clear, concise answers for the following.
1. What are revenues?
2. What are expenses?
3. What are gains?
4. What are losses?
5. When does a discontinued operation occur?
6. Indicate how earnings per share is computed.
7. What is the primary category of prior period adjustments and how are they reported in the
financial statements?
Solution 4-136
1. Revenues are increases in economic benefits during the period that arise from the ordinary
activities of a company.
2. Expenses are decreases in economic benefits during the period that arise from the ordinary
activities of a company.
3. Gains are increases in economic benefits that may or may not arise in the ordinary activities
of a company.
4. Losses are decreases in economic benefits that may or may not arise in the ordinary activities
of a company.
5. A discontinued operation occurs when (a) the results of operations and cash flows of a
component of a company have been eliminated from the ongoing operations, and (b) there is
no significant continuing involvement in that component after the disposal transaction.
6. The computation of earnings per share is: Net income minus preference dividends divided by
the weighted average of ordinary shares outstanding.
7. Prior period adjustments include correction of an error in the financial statements of a prior
period. Prior period adjustments (net of tax) should be debited or credited to the opening
balance of retained earnings.
4 - 35
Ex. 4-137Terminology.
In the space provided, write the word or phrase that is defined or indicated.
1. Net income minus preference dividends
divided by the weighted average of ordinary
shares outstanding.
1. ________________________________
2. All changes in equity during a period except

those resulting from investments by owners
and distributions to owners.
2. ________________________________
3. A correction of an error is reported as a
3. ________________________________
4. A change from one generally accepted

principle to another.
4. ________________________________
5. The income statement category for a

disposal of a component of a business.
5. ________________________________
6. Relating tax expense to specific items

on the income statement.
6. ________________________________
Solution 4-137
1.
2.
3.
4.
5.
6.
Earnings per share.

Comprehensive income.
Prior period adjustment.
Changes in accounting principle.
Discontinued operations.
Intraperiod tax allocation.
Ex. 4-138Calculation of net income from the change in equity.

Presented below is certain information pertaining to Edson Company.
Assets, January 1
Assets, December 31
Liabilities, January 1
Share capital, December 31
Retained earnings, December 31
Ordinary shares sold during the year
Dividends declared during the year
Compute the net income for the year.
$240,000
230,000
160,000
80,000
31,000
10,000
13,000
4 - 36
Solution 4-138
Assets
Liabilities
Equity
January 1
$240,000
160,000
$ 80,000
Computation of net income:

Equity December 31
Equity January 1
Increase
Add: Dividend declared
Less: Ordinary shares sold
Net income
December 31
$111,000*
$111,000
80,000
31,000
13,000
(10,000)
$ 34,000
*$80,000 + $31,000
Ex. 4-139Calculation of net income from the change in equity.

Presented below are changes (in thousands) in the account balances of Wenn Company during
the year, except for retained earnings.
Increase
Increase
(Decrease)
(Decrease)
Cash
25,000
Accounts payable
34,000
Accounts receivable (net)
(13,000)
Bonds payable
(20,000)
Inventory
52,000
Share capital
72,000
Plant assets (net)
37,000
Share premium
16,000
The only entries in Retained Earnings were for net income and a dividend declaration of $10,000.
Compute the net income for the current year.
Solution 4-139
Computation of net income
Change in assets (114,000 13,000)
Change in liabilities (34,000 20,000)
Change in equity
Add: Dividend declared
Less: Investment by shareholders
Net income
101,000
14,000
87,000
10,000
(88,000)
9,000
Increase
Increase
Increase
4 - 37
Ex. 4-140Income measures.

Presented below is information related to Watt Company in its first year of operation. The
following information is provided at December 31, 2015, the end of its first year.
Sales revenue
420,000
Cost of good sold
210,000
Selling and administrative expenses
75,000
Gain on sale of plant assets
45,000
Unrealized gain on non-trading securities
15,000
Financing costs
10,000
Loss on discontinued operations
20,000
Allocation to non-controlling interest
60,000
Dividends declared and paid
12,000
Compute the following (a) income from operations, (b) net income, (c) net income attributable to
Watt Company shareholders, (d) comprehensive income, and (e) retained earnings balance at
December 31, 2015.
Solution 4-140
Sales revenue......................................................................................................... 420,000
Cost of goods sold.................................................................................................. 210,000
Gross profit............................................................................................................. 210,000
Selling and administrative expenses.......................................................................
75,000
Other income and expenses
Gain on sale of plant assets..........................................................................
Income from operations..........................................................................................
Financing costs.......................................................................................................
Income from continued operations..........................................................................
Loss on discontinued operations............................................................................
Net income.............................................................................................................
Allocation to non-controlling interest.......................................................................
Net income attributable to shareholders.................................................................
45,000
180,000(a)
10,000
170,000
(20,000)
150,000(b)
60,000
90,000(c)
Net income............................................................................................................. 150,000

Unrealized gain on non-trading securities...............................................................
15,000
Comprehensive income.......................................................................................... 165,000(d)
Net income............................................................................................................. 150,000
Dividends declared and paid..................................................................................
12,000
Retained earning December 31, 2015.................................................................... 138,000(e)
4 - 38
Ex. 4-141Income Computations.

Presented below is financial information related to Finney Company
Revenue
Comprehensive income
Net income
950,000
120,000
140,000
100,000
260,000
600,000
250,000
Compute the following (a) other income and expense, (b) financing costs, (c) income tax,
(d) discontinued operations, and (e) other comprehensive income.
Solution 4-141
a.
b.
c.
d.
e.
Other income and expense = 950,000 600,000 260,000 = 90,000.

Financing costs = 260,000 250,000 = 10,000.
Income tax = 250,000 120,000 = 130,000.
Discontinued operations = 120,000 100,000 = (20,000).
Other Comprehensive income = 140,000 100,000 = 40,000.
Ex. 4-142Income statement classifications.

Indicate the major section or subsection of an income statement in which each of the following
items would usually appear:
a. Advertising
b. Depletion
c. Dividend revenue
d. Freight-in
e. Loss on disposal of a component of the business, net of tax
f. Income taxes on income
g. Interest revenue
h. Purchase discounts
i. Sales discounts
j. Officers' salaries
k. Freight-out
4 - 39
Solution 4-142
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Selling expense.
Cost of goods sold.
Other income and expense.
Cost of goods sold as an addition to purchases.
Income taxes; subtracted from income before income taxes in arriving at net income.
Cost of goods sold as a subtraction from purchases.
Subtracted from gross revenues.
Administrative or general expenses.
Selling expense.
Ex. 4-143Income statement relationships.

Fill in the appropriate blanks for each of the independent situations below.
Company A
Company B
Sales revenue
(a) _______
343,400
Beginning inventory
52,600
(d) _______
Net purchases
175,300
255,600
Ending inventory
52,200
108,000
Cost of goods sold
(b) _______
(e) _______
Gross profit
95,300
88,000
Operating expenses
(c) _______
50,000
Income before taxes
6,000
(f) _______
Solution 4-143
(a) 271,000
(b) 175,700
(c) 89,300
(d) 107,800
(e) 255,400
(f) 38,000
(g) 360,000
(h) 153,000
(i) 105,000
Company C
540,000
90,000
(g) _______
63,000
387,000
(h) _______
48,000
(i) _______
4 - 40
Ex. 4-144 Income statement.

Listed below in scrambled order are 11 income statement categories. Use the numerals 1 through
11 to indicate the order in which these categories should appear on an income statement.
(
Cost of goods sold.
Net income.
Income taxes.
Sales.
Gross profit.
Income from operations.
Income before income taxes.
Selling and administrative expenses.
Income from continuing operations.
Solution 4-144
10, 2, 5, 11, 8, 1, 3, 6, 7, 4, 9
4 - 41
Ex. 4-145Classification of income statement and retained earnings statement items.

For each of the items listed below, indicate how it should be treated in the financial statements.
Use the following letter code for your selections:
a. Other income and expense item on the income statement
b. Discontinued operations
c. Prior period adjustment
______
1.
The company incurred a loss from impairment of plant assets.
______
2.
Obsolete inventory was written off. This was the first loss of this type in the
company's history.
______
3.
Loss on the disposal of a component of the business.
______
4.
Recognition of income earned last year which was inadvertently omitted from last
year's income statement.
______
5.
The company sold one of its warehouses at a loss.
______
6.
Settlement of litigation with federal government related to income taxes of three

years ago. The company is continually involved in various adjustments with the
federal government related to its taxes.
______
7.
Loss on sale of investments. The company last sold some of its investments two
years ago.
______
8.
The company neglected to record its depreciation in the previous year.
______
9.
Discontinuance of all production in the United States. The manufacturing

operations were relocated in Mexico.
Solution 4-145
1. a
2. a
3. b
4. c
5. a
6. a
7. a
8. c
9. a
4 - 42
PROBLEMS
Pr. 4-146Income statement.
Presented below is information (in thousands) related to Chen Company.
Retained earnings, December 31, 2014
Sales revenue
Loss on disposal of component (pre-tax)
Cash dividends declared on ordinary shares
Cost of goods sold
Gain resulting from computation error on depreciation charge in 2013 (pre-tax)
Rent revenue
Impairment loss
Interest expense
650,000
1,400,000
240,000
260,000
33,600
830,000
520,000
120,000
90,000
10,000
Instructions
Prepare in good form an income statement for the year 2015. Assume a 30% tax rate and that
there were 70,000 ordinary shares outstanding during the year.
Solution 4-146
Chen Company
INCOME STATEMENT
For the Year Ended December 31, 2015
Sales revenue
Cost of goods sold
Gross profit
Other income and expense
Impairment loss
Interest expense
Income before taxes
Income taxes
Discontinued operations, net of applicable income taxes of 78,000
Net income
Per share
Income from continuing operating
Discontinued operations net of tax
Net income
3.50
(2.60)
0.90
1,400,000
830,000
570,000
(240,000)_
120,000
(90,000)
360,000
10,000
350,000
(105,000)
245,000
(182,000)
63,000
4 - 43
Pr. 4-147Income statement form.

Wilcox Corporation had income from continuing operations of $900,000 (after taxes) in 2015. In
addition, the following information has not been considered.
1. A machine was sold for $140,000 cash during the year at a time when its book value was
$110,000. (Depreciation has been properly recorded.) The company often sells machinery of
this type.
2. Wilcox decided to discontinue its stereo division in 2015. During the current year, the loss on
the disposal of this component of the business was $170,000 less applicable taxes.
Instructions
Present in good form the income statement of Wilcox Corporation for 2015 starting with "income
from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 ordinary shares
were outstanding during the year.
Solution 4-147
Wilcox Corporation
Partial Income Statement
Discontinued operations
Loss on disposal of a component of a business,
$170,000, less applicable income taxes, $51,000
Net income
Per shareIncome from cont. operations
Discontinued operations, net of tax
Net income
*Income from cont. operations (unadjusted)
Gain on sale of machinery (after tax)
Income from cont. operations (adjusted)
$921,000*
(119,000)
$802,000
$4.61
(0.60)
$4.01
$900,000
21,000
$921,000
4 - 44

Shown below is an income statement for 2015 that was prepared by a poorly trained bookkeeper
of Howell Corporation.
Howell Corporation
INCOME STATEMENT
December 31, 2015
Sales revenue
Interest revenue
Cost of merchandise sold
Selling expenses
Administrative expense
Interest expense
Income before special item
Special item
Loss on disposal of a component of the business
Net income tax liability
Net income
$895,000
19,500
(408,500)
(145,000)
(215,000)
(13,000)
133,000
(40,000)
(27,900)
$65,100
Instructions
Prepare an income statement for 2015 for Howell Corporation that is presented in accordance
with IFRS (including format and terminology). Howell Corporation has 50,000 ordinary shares
outstanding and has a 30% income tax rate on all tax related items. Round all earnings per share
figures to the nearest cent.
Solution 4-148
Howell Corporation
INCOME STATEMENT
Sales
Cost of goods sold
Gross profit
Selling expenses
$145,000
215,000
Other income: Interest revenue
Interest expense
Income taxes
Loss from discontinued operations, net of applicable income tax of $12,000
Net income
$895,000
408,500
486,500
360,000
19,500
146,000
13,000
133,000
39,900
93,100
28,000
$65,100
4 - 45
Solution 4-148 (cont.)

Per share
Discontinued operations loss net of tax
Net income
$1.86
(0.56)
$1.30

Presented below is an income statement for Kinder Company for the year ended December 31,
2015.
Kinder Company
Income Statement
Net sales
Costs and expenses:
Cost of goods sold
Selling, general, and administrative expenses
Other, net
Income taxes
Net income
$850,000
640,000
70,000
20,000
730,000
120,000
36,000
$ 84,000
Additional information:
1. "Selling, general, and administrative expenses" included a charge of $7,000 for impairment of
intangibles.
2. "Other, net" consisted of interest expense, $5,000, and a discontinued operations loss of
$15,000 before taxes. If the loss had not occurred, income taxes for 2015 would have been
$40,500 instead of $36,000.
3. Kinder had 20,000 ordinary shares outstanding during 2015.
Instructions
Prepare a corrected income statement, including the appropriate per share disclosures.
4 - 46
Solution 4-149
Kinder Company
Income Statement
Net sales
Cost of goods sold
Gross profit
Selling, general, and administrative expenses
Other income and expense
Loss on impairment
Interest expense
Income before taxes
Income taxes
Loss on disposal of component
Less applicable taxes
Net income
Per share
Discontinued operations, net of tax
Net income
$850,000
640,000
$210,000
63,000
7,000
140,000
5,000
135,000
40,500
94,500
15,000
4,500
$4.73
(0.53)
$4.20
10,500
$ 84,000
4 - 47
Pr. 4-150Income statement and retained earnings statement.

Wang Corporation's capital structure consists of 40,000 ordinary shares. At December 31, 2015
an analysis of the accounts and discussions with company officials revealed the following
information:
Sales
Purchase discounts
Purchases
Loss on discontinued operations (net of tax)
Selling expenses
Cash
Accounts receivable
Share capital
Accumulated depreciation
Dividend revenue
Inventory, January 1, 2015
Inventory, December 31, 2015
Unearned service revenue
Accrued interest payable
Land
Patents
Retained earnings, January 1, 2015
Interest expense
General and administrative expenses
Dividends declared
Allowance for doubtful accounts
Notes payable (maturity 7/1/18)
Machinery and equipment
Materials and supplies
Accounts payable
1,050,000
18,000
642,000
28,000
128,000
60,000
90,000
200,000
180,000
8,000
152,000
125,000
4,400
1,000
370,000
100,000
290,000
17,000
150,000
29,000
5,000
200,000
450,000
40,000
60,000
The amount of income taxes applicable to ordinary income was 33,600, excluding the tax effect
of the discontinued operations loss which amounted to 12,000.
Instructions
(a) Prepare an income statement.
(b) Prepare a retained earnings statement.
4 - 48
Solution 4-150
WANG CORPORATION
Income Statement
Sales
Cost of goods sold:
Merchandise inventory, Jan. 1
Purchases
Less purchase discounts
Net purchases
Merchandise available for sale
Less merchandise inv., Dec. 31
Cost of goods sold
1,050,000
152,000
642,000
18,000
Gross profit
Selling expenses
General and administrative expenses
Other income and expense:
Dividend revenue
Interest expense
Income taxes
Loss on disposal, less applicable taxes of $12,000
Net income
Per share of share capital
Discontinued operations,
Net income
624,000
776,000
125,000
651,000
399,000
128,000
150,000
278,000
8,000
129,000
17,000
112,000
33,600
78,400
28,000
50,400
1.96
(0.70)
1.26
WANG CORPORATION
Retained Earnings Statement
Retained earnings, January 1, 2015
Add: Net income
Deduct: Dividends declared
Retained earnings, December 31, 2015
290,000
50,400
29,000
21,400
311,400
4 - 49
Pr. 4-151Irregular items and financial statements.

The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the
appropriate accounting treatment of the six items listed below during the fiscal year ending
December 31, 2015. Assume a tax rate of 40 percent.
1.
The corporation disposed of its sporting goods division during 2015. This disposal meets
the criteria for discontinued operations. The division correctly calculated income from
operating this division of $150,000 before taxes and a loss of $20,000 before taxes on the
disposal of the division. All of these events occurred in 2015 and have not been recorded.
2.
The company recorded advances of $15,000 to employees made December 31, 2015 as
Salaries and Wages Expense.
3.
Dividends of $10,000 during 2015 were recorded as an operating expense.
4.
In 2015, Bakersfield changed its method of accounting for inventory from the first-in firstout method to the average cost method. Inventory in 2015 was correctly recorded using
the average cost method. The new inventory method would have resulted in an additional
$125,000 of cost of goods sold (before taxes) being reported on prior years' income
statement.
5.
Office equipment purchased January 1, 2015 for $60,000 was incorrectly charged to
Supplies Expense at the time of purchase. The office equipment has an estimated threeyear service life with no expected residual value. Bakersfield uses the straight-line method
to depreciate office equipment for financial reporting purposes. This error has not been
corrected.
6.
On January 1, 2011, Bakersfield bought a building that cost $85,000, had an estimated
useful life of ten years, and had a residual value of $5,000. Bakersfield uses the
straight-line depreciation method to depreciate the building. In 2015, it was estimated that
the remaining useful life was eight years and the residual value was zero. Depreciation
expense reported on the 2015 income statement was correctly calculated based on the
new estimates. No adjustment for prior years' depreciation estimates was made.
Part A. For each item, indicate corrections to income from continuing operations before
taxes, if any. Denote any negative numbers by using brackets < >.
4 - 50
Solution 4-151
Number Item
Description
Increase <Decrease> to
Income from Continuing
Operations
1.
Discontinued Items reported after Income from

Continuing Operations
No Effect
2.
Correct with Dr: Advances to Employees
$15,000
Cr: Salaries and Wages Expense

3.
Dividends are not reported on the Income

Statement; should be on Statement of R/E.
$10,000
4.
Change in inventory method: Current year

reported correctly on income statement, need to
adjust beginning R/E.
No Effect
5.
To correct, need to put all $60,000 into

Equipment account and take out of Supplies
Expense account. Also take depreciation of
$20,000 for the year. Net effect is to increase
income by $40,000.
$40,000
6.
Current year is correct. Change in estimate does

not need retroactive action.
No Effect
4 - 51
Part B. At January 1, 2015, Bakersfield, Inc.'s retained earnings balance was $200,000.
Assume that income before income tax and after correctly considering any of the six
additional items in Part A was $1,000,000. Prepare the income statement and retained
earnings statement. Denote negative numbers by using brackets < >. Do not
disclose earnings per share data.
BAKERSFIELD INCORPORATED
Partial Income Statement
For the Year Ending December 31, 2015
$1,000,000
Income tax ($1,000,000 40%)

<400,000>
600,000
Income from discontinued operations net of tax
90,000
($150,000 60%)
Loss on disposal of discontinued operation net of tax
<12,000>
($20,000 60%)
Net income
$678,000
BAKERSFIELD INCORPORATED
Retained Earnings Statement
For the Year Ending December 31, 2015
Beginning Retained earnings as of January 1, 2015

Adjustment for change in inventory method
$200,000
<75,000>
($125,000 60%)
Beginning Retained earnings as adjusted
125,000
Add: Net Income
678,000
Less: Dividends
<10,000>
Ending Retained earnings
$793,000
4 - 52
Short Answer:
1. What are IFRS requirements with respect to expense classification?
1. Under IFRS expenses must be classified by either nature or function. Classification by
nature leads to descriptions such as the following: salaries, depreciation expense, utilities
expense and so on. Classification by function leads to descriptions like administration,
distribution, and manufacturing. Disclosure by nature is required in the notes to the financial
statements if the functional expense method is used on the income statement. There is no
U.S. GAAP in this area, except the SEC does require public companies to report their
expenses by function.
2. Bradshaw Company experienced a loss that was deemed to be both unusual in nature and
infrequent in occurrence. How should Bradshaw report this item in accordance with IFRS?
2. Bradshaw should report this item similar to other unusual gains and losses. While under
U.S. GAAP, companies are required to report an item as extraordinary if it is unusual in nature
and infrequent in occurrence, extraordinary item reporting is prohibited under IFRS.

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CHAPTER 4

INCOME STATEMENT AND RELATED INFORMATION

Understand the uses and limitations of an income statement.

Understand the content and format of the income statement.

Prepare an income statement.

Explain how to report items in the income statement.

Identify where to report earnings per share information.

Explain intraperiod tax allocation.

Understand the reporting of accounting changes and errors.

Prepare a retained earnings statement.

Explain how to report other comprehensive income.

Test Bank to accompany Intermediate Accounting: IFRS Edition

Income Statement and Related Information

True False AnswersConceptual

The major elements of the income statement are

Information in the income statement helps users to

Limitations of the income statement include all of the following except

Test Bank to accompany Intermediate Accounting: IFRS Edition

The income statement reveals

Which of the following is an example of managing earnings down?

Which of the following is an example of managing earnings up?

Income Statement and Related Information

Which of the following situations involving different accounting methods or accounting

Which method of income measurement is used in the preparation of the income

Which of the following equations expresses the definition of income?

Which of the following is not required to be presented on the income statement

The non-controlling interest section of the income statement is shown

The definition of expenses includes

Test Bank to accompany Intermediate Accounting: IFRS Edition

44. Which of the following is not a selling expense?

Income Statement and Related Information

In which section of the income statement is interest expense reported?

Earnings per share relate to

The earnings per share computation is not required for

Given the following income statement line items:

Test Bank to accompany Intermediate Accounting: IFRS Edition

Earnings per share should always be shown separately for

When a company discontinues an operation and disposes of the discontinued operation

Income taxes are allocated to

Which of the following is true about intraperiod tax allocation?

Income Statement and Related Information

A change in accounting principle requires what kind of adjustment to the financial

Changes in estimates affect reported amounts

Prior years income statements are not restated for

Which of the following does not appear on a statement of retained earnings?

Which of the following would appear first in a statement of retained earnings?

Test Bank to accompany Intermediate Accounting: IFRS Edition

In the income statement

Which of the following is included in comprehensive income?

Comprehensive income includes all of the following except

Comprehensive income includes all of the following, except

Income Statement and Related Information

Under IFRS other comprehensive income must be displayed (reported) in

Multiple Choice AnswersConceptual

Ortiz Co. had the following account balances:

Test Bank to accompany Intermediate Accounting: IFRS Edition

For Mortenson Company, the following information is available:

In Mortensons income statement, gross profit

For Rondelli Company, the following information is available: