EXERCISE 4-5

Maria Conchita Alonzo Corp.
Income Statement
For the Year Ended December 31, 2004
Sales Revenue
Sales		$1,380,000
Less: Sales returns and allowances	$150,000
Sales discounts	45,000	195,000
Net sales revenue		1,185,000
Cost of goods sold		621,000
Gross profit		564,000
Operating Expenses
Selling expenses	194,000
Admin. and general expenses	97,000	291,000
Income from operations		273,000

Other Revenues and Gains
Interest revenue		86,000
		359,000
Other Expenses and Losses
Interest expense		60,000
Income before taxes and extraordinary item		299,000
Income taxes ($299,000 X .34)		101,660
Income before extraordinary item		197,340
Extraordinary item
Loss from earthquake damage	150,000
Less applicable tax reduction ($150,000 X .34)	51,000	99,000
Net income		$ 98,340

Per share of common stock:
Income before extraordinary item ($197,340 ¸ 100,000)	$1.97
Extraordinary item (net of tax)	(.99)
Net income ($98,340 ¸ 100,000)	$ .98

EXERCISE 4-7

(a) Net sales $ 540,000

Less: Cost of Goods sold (210,000)

Administrative Expenses (100,000)

Selling expenses (80,000)

Discontinued operations-loss (40,000)

Income before income taxes 110,000

Income tax ($110,000 X .30) 33,000

Net income $ 77,000

(b) Income from continuing operations before income tax $150,000*

Income tax ($150,000 X .30) 45,000

Income from continuing operations 105,000

Discontinued operations, less applicable income tax of

$12,000 (28,000)

Net income $ 77,000

*$110,000 + $40,000

EXERCISE 4-10

Spock Corporation
Income Statement
For the Year Ended December 31, 2004
Net sales		$4,162,000
Cost of goods sold		2,665,000
Gross profit		1,497,000
Selling expenses	$636,000
Administrative expenses	491,000	1,127,000
Income from operations		370,000
Other revenue	240,000
Other expense	(176,000)	64,000
Income before taxes		434,000
Income taxes ($434,000 X .34)		147,560
Income before extraordinary item		286,440
Extraordinary loss, net of $23,800 taxes		46,200
Net income		$ 240,240
Earnings per share ($900,000 ¸ $10 par value = 90,000 shares)
Income before extraordinary item ($286,440 ÷ 90,000)		$3.18
Extraordinary item		(.51)
Net income		$2.67

Supporting computations

Net sales:

$4,275,000 – $34,000 – $79,000 = $4,162,000

Cost of goods sold:

$535,000 + ($2,786,000 + $72,000 – $27,000 – $15,000) – $686,000 = $2,665,000

Selling expenses:

$284,000 + $83,000 + $69,000 + $54,000 + $93,000 + $36,000 + $17,000 = $636,000

Administrative expenses:

$346,000 + $33,000 + $24,000 + $48,000 + $32,000 + $8,000 = $491,000

EXERCISE 4-12

Net income:
Income from continuing operations before taxes		$23,650,000
Income taxes (35% X $23,650,000)		8,277,500
Income from continuing operations		15,372,500
Discontinued operations
Loss before taxes	$3,225,000
Less applicable income tax (35%)	1,128,750	2,096,250
Net income		$13,276,250
Preferred dividends declared:		$ 1,075,000
Weighted average common shares outstanding:
12/31/03–3/31/04 (4,000,000 x 3/12)		1,000,000
4/1/04–12/31/04 (4,400,000 x 9/12)		3,300,000
Weighted average		4,300,000

Earnings per share
Income from continuing operations	$3.33*
Discontinued operations	(.49)**
Net income	$2.84***

*($15,372,500 – $1,075,000) ¸ 4,300,000.

**$2,096,250 ¸ 4,300,000.

***($13,276,250 – $1,075,000) ¸ 4,300,000.

Income from continuing operations before income taxes		550,000
Income taxes		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, 2004
Retained Earnings, January 1, 2004	$600,000
2004 Net Income	336,600
	$936,600
Dividends Declared	(150,000)
Retained Earnings, December 31, 2004	$786,600

(c) Roland Carlson Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2004
Net Income	$336,600
Other Comprehensive Income
Unrealized Holding Gain	15,000
Comprehensive Income	$351,600

PROBLEM 4-1

American Horse Company
Income Statement
For the Year Ended December 31, 2004
Sales		$25,000,000
Less cost of goods sold		17,000,000
Gross profit		8,000,000
Less selling and administrative expenses		4,700,000
Income from operations		3,300,000
Other revenues and gains
Interest revenue	$ 70,000
Gain on the sale of investments	110,000	180,000
Other expenses and losses
Write-off of goodwill		820,000
Income from continuing operations before income taxes		2,660,000
Income taxes		905,000
Income from continuing operations		1,755,000
Discontinued operations
Loss on operations, net of tax	90,000
Loss on disposal, net of tax	440,000	530,000
Income before extraordinary item		1,225,000
Extraordinary loss from flood damage, net of tax		390,000
Net income		$ 835,000

American Horse Company

Retained Earnings Statement

For the Year Ended December 31, 2004

Retained Earnings, January 1, 2004		980,000
Plus net income		835,000
		1,815,000
Less dividends
Preferred stock	70,000
Common stock	250,000	320,000
Retained Earnings, December 31,2004		$ 1,495,000

Earnings per share:
Income from continuing operations		$ 5.62^a
Discontinued operations
Loss on operations (net of tax)	$( .30)
Loss on disposal (net of tax)	(1.47)	(1.77)
Income before extraordinary item		3.85^b
Extraordinary loss (net of tax)		(1.30)
Net income		$ 2.55^c

^a	$1,755,000 – $70,000	=	$5.62
	300,000 shares
^b	$1,225,000 – $70,000	=	$3.85
	300,000 shares
^c	$835,000 – $70,000	=	$2.55
	300,000 shares

PROBLEM 4-4

	(a) J. R. Reid Corporation
	Income Statement
	For the Year Ended June 30, 2004
	Sales Revenue
	Sales			$1,678,500
	Less: Sales discounts		$31,150
	Sales returns		62,300	93,450
	Net sales			1,585,050
	Cost of Goods Sold			896,770
	Gross profit			688,280
	Operating Expenses
	Selling expenses
	Sales commissions	$97,600
	Sales salaries	56,260
	Travel expense	28,930
	Entertainment expense	14,820
	Freight-out	21,400
	Telephone and internet exp.	9,030
	Depr. of sales equipment	4,980
	Building expense	6,200
	Bad debt expense	4,850
	Misc. selling expense	4,715	248,785
Administrative Expenses
Real estate and other local taxes 7,320
Building expense		9,130
Depreciation of office furniture and equipment		7,250
Office supplies used		3,450
Telephone and internet expense		2,820
Miscellaneous office expenses		6,000	35,970	284,755
Income from operations				403,525

Other Revenues and Gains
Dividend revenue				38,000
				441,525
Other Expenses and Losses
Bond interest expense				18,000
Income before taxes				423,525
Income taxes				133,000
Net income				$ 290,525
Earnings per common share ($290,525 – $9,000 of preferred dividends ¸ 80,000 shares)				$3.52
	J. R. Reid Corporation
	Retained Earnings Statement
	For the Year Ended June 30, 2004
	Retained earnings, July 1, 2003 as reported	$337,000
	Correction of depreciation understatement (net of tax)	17,700
	Adjusted balance of retained earnings at July 1, 2003			$319,300
	Plus net income			290,525
				609,825
	Deduct:
	Dividends declared on preferred stock	9,000
	Dividends declared on common stock	32,000		41,000
	Retained earnings, June 30, 2004			$568,825
	(b) J. R. Reid Corporation
	Income Statement
	For the Year Ended June 30, 2004
	Revenues
	Net sales		$1,585,050
	Dividend revenue		38,000
	Total revenues		1,623,050
	Expenses
	Cost of goods sold		896,770
	Selling expenses		248,785
	Administrative expenses		35,970
	Bond interest expense		18,000
	Total expenses		1,199,525
	Income before taxes		423,525
	Income taxes		133,000
	Net income		$ 290,525
	Earnings per common share		$3.52
	J. R. Reid Corporation
	Retained Earnings Statement
	For the Year Ended June 30, 2004

Retained earnings, July 1, 2003 as reported		$337,000
Correction of depreciation understatement (net of tax)		17,700
Retained earnings, July 1, 2003 adjusted			$319,300
Plus net income			290,525
			609,825
Deduct:
Dividends declared on preferred stock		9,000
Dividends declared on common stock		32,000	41,000
Retained earnings, June 30, 2004			$568,825
	PROBLEM 4-6

LeClair Corp.
Retained Earnings Statement
For the Year Ended December 31, 2004
Retained Earnings, January 1 as reported	$257,600
Correction of error from prior period (net of tax)	25,400
Adjusted balance of retained earnings at January 1	283,000
Add net income	44,100*
Deduct cash dividends declared	32,000
Retained earnings, December 31	$295,100
*$44,100 = ($84,500 + $41,200 + $21,600 – $25,000 – $60,000 – $18,200)

(b) 1. Gain on sale of investments—body of income statement, possibly unusual item

2. Refund of litigation—body of income statement, possibly unusual item.

1. Loss on discontinued operations—body of the income statement, following the caption, “Income from continuing operations.”

2. Write-off of goodwill—body of income statement, possibly unusual item.

3. Cumulative effect of change in depreciation method—body of the income statement, following the caption, “Income before extraordinary item and cumulative effect of change in accounting principle.” If an extraordinary item is reported, the cumulative effect would be reported below this item.

Earnings per share:

Income from continuing operations ($105,000 ÷ 10,000) $10.50

Loss on discontinued operations (2.80)

Net Income ($77,000 ÷ 10,000) $7.70