CH 4 In-Class Exercise

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.
1
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.
2
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] ÷ [($1,500 + 1,350) ÷ 2] = 2.67
10. DuPont framework 3.33% × 2.37 × 2.67 = 21.05%
3
F.
ALEXIAN SYSTEMS, INC.
Income Statement
for the Year Ended December 31, 2016
($ 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

CH 4 In-Class Exercise

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Ch 4 In-class Problems

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

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

Calculate the following ratios for 2018.

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%

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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