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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