E4-6 (Multiple-step and Single-step) The accountant of ...



E4-6 (Multiple-step and Single-step) The accountant of Whitney Houston Shoe Co. has compiled the

following information from the company's records as a basis for an income statement for the year ended

December 31, 2007.

Rental revenue $ 29,000

Interest on notes payable 18,000

Market appreciation on land above cost 31,000

Wages and salaries—sales 114,800

Materials and supplies—sales 17,600

Income tax 37,400

Wages and salaries—administrative 135,900

Other administrative expenses51,700

Cost of goods sold 496,000

Net sales 980,000

Depreciation on plant assets (70% selling, 30% administrative) 65,000

Cash dividends declared 16,000

There were 20,000 shares of common stock outstanding during the year.

Instructions

(a) Prepare a multiple-step income statement.

(b) Prepare a single-step income statement.

(c) Which format do you prefer? Discuss.

|(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 |

|(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. |

| |Multiple-step: |

| |1. Provides more information through segregation of operating and nonoperating items. |

| |2. Expenses are matched with related revenue. |

E4-16 (Various Reporting Formats) The following information was taken from the records of Roland Carlson Inc. for the year 2007. Income tax applicable to income from continuing operations $187,000; income tax applicable to loss on discontinued operations $25,500; income tax applicable to extraordinary gain $32,300; income tax applicable to extraordinary loss $20,400; and unrealized holding gain on available-for-sale securities $15,000.

Extraordinary gain $ 95,000 Cash dividends declared $ 150,000

Loss on discontinued operations75,000 Retained earnings January 1, 2007 600,000

Administrative expenses 240,000 Cost of goods sold850,000

Rent revenue40,000 Selling expenses 300,000

Extraordinary loss60,000 Sales 1,900,000

Shares outstanding during 2007 were 100,000.

Instructions

(a) Prepare a single-step income statement for 2007.

(b) Prepare a retained earnings statement for 2007.

(c) Show how comprehensive income is reported using the second income statement format.

|(a) Roland Carlson Inc. |

|Income Statement |

|For the Year Ended December 31, 2007 |

|Revenues | | |

|Sales | |$1,900,000 |

|Rent revenue | | 40,000 |

| Total revenues | | 1,940,000 |

| | | |

|Expenses | | |

| Cost of goods sold | |850,000 |

| Selling expenses | |300,000 |

| Administrative expenses | | 240,000 |

| Total expenses | |$1,390,000 |

|Income from continuing operations before | | |

|income tax | |550,000 |

| Income tax | | 187,000 |

|Income from continuing operations | |363,000 |

|Discontinued operations | | |

| Loss on discontinued operations |$75,000 | |

| Less: Applicable income tax reduction | 25,500 | 49,500 |

|Income before extraordinary items | |313,500 |

|Extraordinary items: | | |

| Extraordinary gain |95,000 | |

| Less: Applicable income tax | 32,300 | 62,700 |

| | |376,200 |

| Extraordinary loss |60,000 | |

| Less: Applicable income tax reduction | 20,400 | 39,600 |

|Net income | |$ 336,600 |

|Per share of common stock: | | |

| Income from continuing operations ($363,000 ÷ 100,000) | |$3.63 |

| Loss on discontinued operations, net of tax | | (.49) |

| Income before extraordinary items ($313,500 ÷ 100,000) | |3.14 |

| Extraordinary gain, net of tax | |.63 |

| Extraordinary loss, net of tax | | (.40) |

| Net income ($336,600 ÷ 100,000) | |$3.37 |

|(b) Roland Carlson Inc. |

|Retained Earnings Statement |

|For the Year Ended December 31, 2007 |

|Retained earnings, January 1 | |$600,000 |

|Add: Net income | | 336,600 |

| | |$936,600 |

|Less: Dividends declared | | 150,000 |

|Retained earnings, December 31 | |$786,600 |

|(c) Roland Carlson Inc. |

|Comprehensive Income Statement |

|For the Year Ended December 31, 2007 |

|Net income | |$336,600 |

|Other comprehensive income | | |

| Unrealized holding gain | | 15,000 |

|Comprehensive income | |$351,600 |

E18-4 (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a construction job with a contract price of $1,500,000. The job was completed in 2009. The following information is available.

2007 2008 2009

Costs incurred to date $400,000 $935,000 $1,070,000

Estimated costs to complete 600,000 165,000–0–

Billings to date300,000 900,000 1,500,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of completion method is used.

(b) Prepare all necessary journal entries for 2008.

(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.

(a) Gross profit recognized in:

| |2007 |2008 |2009 |

|Contract price | |$1,500,000 | |$1,500,000 | |$1,500,000 |

|Costs: | | | | | | |

|Costs to date |$400,000 | |$935,000 | |$1,070,000 | |

|Estimated costs to | | | | | | |

|complete | | | | | | |

| |600,000 |1,000,000 |165,000 |1,100,000 |0 |1,070,000 |

|Total estimated profit | | | | | | |

| | |500,000 | |400,000 | |430,000 |

|Percentage completed to date | | | | | | |

| | |40%* | |85%** | |100% |

|Total gross profit recognized | | | | | | |

| | |200,000 | |340,000 | |430,000 |

|Less: Gross profit recognized | | | | | | |

|in previous years | | | | | | |

| | |0 | |200,000 | |340,000 |

|Gross profit recognized| | | | | | |

|in current year | | | | | | |

| | |$ 200,000 | |$ 140,000 | |$ 90,000 |

**$400,000 ÷ $1,000,000

**$935,000 ÷ $1,100,000

(b) Construction in Process 535,000

($935,000 – $400,000)

Materials, Cash, Payables, etc. 535,000

Accounts Receivable ($900,000 – $300,000) 600,000

Billings on Construction in Process 600,000

Cash ($810,000 – $270,000) 540,000

Accounts Receivable 540,000

Construction Expenses 535,000

Construction in Process 140,000

Revenue from Long-Term Contracts 675,000*

*$1,500,000 X (85% – 40%)

(c) Gross profit recognized in:

| |2007 |2008 |2009 |

|Gross profit |$ –0– |$ –0– |$430,000* |

*$1,500,000 – $1,070,000

E18-5 (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction

Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Beth

Botsford uses the percentage-of-completion method for financial accounting purposes. The income to berecognized each year is based on the proportion of cost incurred to total estimated costs for completingthe contract. The financial statement presentations relating to this contract at December 31, 2007, follow.

Balance Sheet

Accounts receivable—construction contract billings $21,500

Construction in progress $65,000

Less: Contract billings 61,500

Cost of uncompleted contract in excess of billings 3,500

Income Statement

Income (before tax) on the contract recognized in 2007 $18,200

Instructions

(a) How much cash was collected in 2007 on this contract?

(b) What was the initial estimated total income before tax on this contract?

(a) Contract billings to date $61,500

Less: Accounts receivable 12/31/07 21,500

Portion of contract billings collected $40,000

|(b) |$18,200 |= 28% |

| |$65,000 | |

(The ratio of gross profit to revenue recognized in 2007.)

$1,000,000 X .28 = $280,000

(The initial estimated total gross profit before tax on the contract.)

P18-7 (Long-Term Contract with an Overall Loss) On July 1, 2007, Kyung-wook Construction Company Inc. contracted to build an office building for Mingxia Corp. for a total contract price of $1,950,000. On July 1, Kyung-wook estimated that it would take between 2 and 3 years to complete the building. On December 31, 2009, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Mingxia for 2007, 2008, and 2009.

AtAt At

12/31/07 12/31/0812/31/09

Contract costs incurred to date$ 150,000 $1,200,000 $2,100,000

Estimated costs to complete the contract1,350,000800,000 –0–

Billings to Mingxia300,0001,100,0001,850,000

Instructions

(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2007, 2008, and 2009. (Ignore income taxes.)

(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be

recognized as a result of this contract for the years ended December 2007, 2008, and 2009. (Ignore income taxes.)

(a) Computation of Recognizable Profit/Loss

Percentage-of-Completion Method

2007

Costs to date (12/31/07) $ 150,000

Estimated costs to complete 1,350,000

Estimated total costs $1,500,000

Percent complete ($150,000 ÷ $1,500,000) 10%

Revenue recognized ($1,950,000 X 10%) $ 195,000

Costs incurred 150,000

Profit recognized in 2007 $ 45,000

2008

Costs to date (12/31/08) $1,200,000

Estimated costs to complete 800,000

Estimated total costs 2,000,000

Contract price 1,950,000

Total loss $ 50,000

Total loss $ 50,000

Plus gross profit recognized in 2007 45,000

Loss recognized in 2008 $ (95,000)

OR

Percent complete ($1,200,000 ÷ $2,000,000) 60%

Revenue recognized in 2008

[($1,950,000 X 60%) – $195,000] $ 975,000

Costs incurred in 2008

($1,200,000 – $150,000) 1,050,000

Loss to date 75,000

Loss attributable to 2009* 20,000

Loss recognized in 2008 $ (95,000)

*2009 revenue

($1,950,000 – $195,000 – $975,000) $780,000

2009 estimated costs 800,000

2009 loss $ (20,000 )

2009

Costs to date (12/31/09) $2,100,000

Estimated costs to complete 0

2,100,000

Contract price 1,950,000

Total loss $ (150,000)

Total loss $ (150,000)

Less: Loss recognized in 2008 $95,000

Gross profit recognized in 2007 (45,000 ) (50,000)

Loss recognized in 2009 $ (100,000)

(b) Computation of Recognizable Profit/Loss

Completed-Contract Method

2007—NONE

2008

Costs to date (12/31/08) $1,200,000

Estimated costs to complete 800,000

Estimated total costs 2,000,000

Deduct contract price 1,950,000

Loss recognized in 2008 $ (50,000)

2009

Total costs incurred $2,100,000

Total revenue recognized 1,950,000

Total loss on contract (150,000)

Deduct loss recognized in 2008 (50,000)

Loss recognized in 2009 $ (100,000)

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