Exercise 4-7
Exercise 4-7
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|ESQUIRE COMIC BOOK COMPANY | |
|Income Statement | |
|For the Year Ended December 31, 2003 | |
| | |
|Income from continuing operations * | $ 558,000 |
| | |
|Discontinued operations: | |
|Income from operations of discontinued component | |
| (including loss on disposal of $350,000) | 150,000 |
| Income tax expense | 60,000 |
| Income on discontinued operations | 90,000 |
|Income before cumulative effect of accounting change | 648,000 |
|Cumulative effect of a change in depreciation method | |
|(net of a $48,000 tax expense) |72,000 |
|Net income | $ 720,000 |
| | |
* Income from continuing operations:
Income before considering additional items $1,000,000
Decrease in income due to restructuring costs (70,000)
Before-tax income from continuing operations 930,000
Income tax expense (40%) (372,000)
Income from continuing operations $ 558,000
Exercise 4-8
Requirement 1
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|KANDON ENTERPRISES, INC. | |
|Income Statement | |
|For the Year Ended December 31, 2003 | |
| | |
|Income from continuing operations | $ 400,000 |
| | |
|Discontinued operations: | |
|Loss from operations of discontinued component | |
|(including impairment loss of $50,000) * |(190,000) |
|Income tax benefit | 76,000 |
| Loss on discontinued operations | (114,000) |
|Net income | $ 286,000 |
| | |
* Loss on discontinued operations:
Operating loss $(140,000)
Impairment loss ($250,000 - 200,000) (50,000)
Net before-tax loss (190,000)
Income tax benefit (40%) 76,000
Net after-tax loss on discontinued operations $(114,000)
Requirement 2
| | |
|KANDON ENTERPRISES, INC. | |
|Income Statement | |
|For the Year Ended December 31, 2003 | |
| | |
|Income from continuing operations |$ 400,000 |
| | |
|Discontinued operations: | |
|Loss from operations of discontinued component * | (140,000) |
|Income tax benefit | 56,000 |
| Loss on discontinued operations | (84,000) |
|Net income |$ 316,000 |
| | |
* Includes only the operating loss during the year. There is no impairment loss.
Exercise 4-9
Requirement 1
This is a change in accounting estimate.
Requirement 2
When an estimate is revised as new information comes to light, accounting for the change in estimate is quite straightforward. We do not restate prior years' financial statements to reflect the new estimate; nor do we report the cumulative effect of the change in current income. Instead, we merely incorporate the new estimate in any related accounting determinations from there on. If the after-tax income effect of the change in estimate is material, the effect on net income and earnings per share must be disclosed in a note, along with the justification for the change.
Requirement 3
$800,000 Cost
$160,000 Old annual depreciation ($800,000 ÷ 5 years)
x 2 years 320,000 Depreciation to date (2001-2002)
480,000 Book value
÷ 6 Estimated remaining life (8 years - 2 years)
$ 80,000 New annual depreciation
Exercise 4-10
Requirement 1
This is a change in accounting principle.
Requirement 2
The cumulative income effect is reported — net of the tax effect of the change — in the income statement as a separate item of income, between extraordinary items and net income. The before-tax effect is $(192,000), calculated as follows:
Exercise 4-10 (concluded)
Cumulative effect of the change: ($ in thousands)
Straight-line DDB
2001 depreciation $160 $320
2002 depreciation 160 192
Accumulated depreciation
and 2001-2002 reduction in income $320 ( ( $512
difference
$(192)
The after-tax effect is $(115,200) = [$(192,000) x (1-.40)].
Exercise 4-12
1. d
2. d
3. d
Exercise 4-13
1. b Purchase of equipment for cash.
2. a Payment of employee salaries.
3. a Collection of cash from customers.
4. c Cash proceeds from a note payable.
5. b Purchase of common stock of another corporation for cash.
6. c Issuance of common stock for cash.
7. b Sale of machinery for cash.
8. a Payment of interest on note payable.
9. d Issuance of bonds payable in exchange for land and building.
10. c Payment of cash dividends to shareholders.
11. c Payment of principal on note payable.
Exercise 4-17
List A List B
f 1. Intraperiod tax allocation a. Unusual, infrequent, and material gains and losses.
g 2. Comprehensive income b. Starts with net income and works backwards to convert to cash.
a 3. Extraordinary items c. Reports the cash effects of each operating activity directly on the statement.
l 4. Operating income d. Correction of a material error of a prior period.
k 5. An operation (according to SFAS 144) e. Related to the external financing of the company.
j 6. Earnings per share f. Associates tax with income statement item.
d 7. Prior period adjustment g. Total nonowner change in equity.
e 8. Financing activities h. Related to the transactions entering into the determination of net income.
h 9. Operating activities (SCF) i. Related to the acquisition and disposition of long-term assets.
i 10. Investing activities j. Required disclosure for publicly traded
corporation.
c 11. Direct method k. A component of an entity.
b 12. Indirect method l. Directly related to principal revenue-generating
activites.
Problem 4-6
1. Restructuring is an example of an event that is either unusual or infrequent, but not both. Restructuring costs should be included in income from continuing operations but reported as a separate income statement component. The item is reported gross, not net of tax as with extraordinary gains and losses.
2. The extraordinary gain should be presented, net of tax, in the income statement below income from continuing operations. Also, earnings per share for income from continuing operations and for the extraordinary item should be disclosed.
3. The correction of the error should be treated as a prior period adjustment to beginning retained earnings, not as an adjustment to current year's cost of goods sold. In addition, the 2002 financial statements should be restated to reflect the correction, and a disclosure note is required that communicates the impact of the error on 2002 income.
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