Escolar Documentos
Profissional Documentos
Cultura Documentos
Objective
14-1
14-2
14-2
14-2
14-2
14-2
14-2
14-3
14-4
14-5
14-5
14-5
14-5
14-5
14-5
14-5
14-1
14-1
14-2
PE14-2B
14-2
PE14-3A
14-3
PE14-3B
14-3
PE14-4A
14-4
PE14-4B
14-4
PE14-5A
14-5
PE14-5B
14-5
PE14-6A
PE14-6B
Ex14-1
Ex14-2
14-5
14-5
14-1
14-1
Ex14-3
14-1
Ex14-4
14-2
Ex14-5
14-2
Ex14-6
14-2
Description
Difficulty
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Time
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
5 min
AACSB
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
AICPA
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
Easy
Easy
Easy
5 min
5 min
15 min
10 min
Analytic
Analytic
Analytic
Analytic
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
15 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
15 min
Analytic
FN-Measurement
767
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resold, copied, or distributed without the prior consent of the publisher.
Number
Ex14-7
Ex14-8
Objective
14-2
14-2
Ex14-9
Ex14-10
Ex14-11
Ex14-12
14-2
14-2
14-2
14-2
Ex14-13
Ex14-14
Ex14-15
14-2, 14-3
14-2, 14-3
14-3
Ex14-16
14-4
Ex14-17
14-4, 14-5
Ex14-18
14-4, 14-5
Ex14-19
14-4, 14-5
Ex14-20
14-5
Ex14-21
14-4, 14-5
Ex14-22
14-5
Ex14-23
14-5
Ex14-24
14-5
Ex14-25
Ex14-26
FAI
FAI
Pr14-1A
Pr14-2A
14-1
14-2, 14-3,
14-4
14-1, 14-2,
14-3, 14-4,
14-5
Pr14-3A
Pr14-4A
14-5
Pr14-1B
Pr14-2B
14-1
14-2,143,14-4
14-1,142,14-3,144,14-5
Pr14-3B
Pr14-4B
14-5
Description
Restructuring charge
Restructuring charges
and asset impairment
Extraordinary item
Extraordinary item
Extraordinary items
Identifying extraordinary items
Income statement
Income statement
Earnings per share
with preferred stock
Comprehensive income
Comprehensive income and temporary
investments
Comprehensive income and temporary
investments
Temporary investments and other comprehensive income
Temporary investments in marketable
securities
Financial statement
reporting of temporary
investments
Entries for investment
in stock, receipt of
dividends, and sale of
shares
Entries for using equity method for stock
investment
Equity method for
stock investment
Price-earnings ratio
Price-earnings ratio
calculations
Income tax allocation
Income tax; income
statement
Income statement;
retained earnings
statement; balance
sheet
Entries for investments in stock
Income tax allocation
Income tax; income
statement
Income statement;
retained earnings
statement; balance
sheet
Entries for investments in stock
Difficulty
Moderate
Easy
Time
20 min
15 min
AACSB
Analytic
Analytic
AICPA
FN-Measurement
FN-Measurement
Easy
Easy
Easy
Easy
5 min
5 min
5 min
10 min
Analytic
Analytic
Analytic
Analytic
FN-Measurement
FN-Measurement
FN-Measurement
FN-Measurement
Easy
Moderate
Easy
15 min
20 min
5 min
Analytic
Analytic
Analytic
FN-Measurement
FN-Measurement
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Moderate
15 min
Analytic
FN-Measurement
Moderate
20 min
Analytic
FN-Measurement
Moderate
15 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Moderate
20 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
5 min
Analytic
FN-Measurement
Easy
Moderate
5 min
10 min
Analytic
Analytic
FN-Measurement
FN-Measurement
Moderate
Moderate
45 min
1 hr
Analytic
Analytic
FN-Measurement
FN-Measurement
Difficult
1 1/2
hr
Analytic
FN-Measurement
Moderate
45 min
Analytic
FN-Measurement
Moderate
Moderate
45 min
1 hr
Analytic
Analytic
FN-Measurement
FN-Measurement
Difficult
1 1/2
hr
Analytic
FN-Measurement
Moderate
45 min
Analytic
FN-Measurement
768
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resold, copied, or distributed without the prior consent of the publisher.
Number
SA14-1
Objective
14-5
SA14-2
14-2
SA14-3
14-4
SA14-4
14-2
SA14-5
14-2
SA14-6
14-2
Description
Equity method disclosure
Special charges
analysis
Comprehensive income
Ethics and professional behavior
Reporting extraordinary item
Extraordinary items
and discontinued operations
Difficulty
Easy
Time
5 min
AACSB
Analytic
AICPA
FN-Measurement
Moderate
20 min
Analytic
FN-Measurement
Easy
10 min
Analytic
FN-Measurement
Easy
5 min
Ethics
BB-Industry
Easy
5 min
Analytic
FN-Measurement
Moderate
45 min
Analytic
FN-Measurement
769
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.
EYE OPENERS
1. a. Current liability
b. Long-term liability or deferred credit (following the Long-Term Liabilities section)
2. This is an example of a fixed asset impairment. Thus, a loss of $100 million should be
disclosed on the income statement as a
separate line item above the income from
continuing operations, and the plant and
equipment should be written down to their
appraised value ($20 million).
3. The severance costs are a current period
expense associated with downsizing operations. Thus, a restructuring charge should
be recognized on the income statement
(above income from continuing operations)
and any liability recognized. As payments
are made to employees, the liability is decreased.
4. Extraordinary items:
Gain on condemnation of land, net of applicable income tax of $48,000.............$72,000
5. The urban renewal agencys acquisition of
the property may be viewed as a form of expropriation under paragraph 23 of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Paragraph 23 says a gain or
loss from sale or abandonment of property,
plant, or equipment used in the business
should be included as an extraordinary item
if it is the direct result of an expropriation.
Accordingly, the gain should be reported as
an extraordinary item in the income statement.
6. The loss from discontinued operations of
$2.3 billion should be identified on the income statement as discontinued operations
and should follow the presentation of the results of continuing operations (sales less the
customary costs and expenses). The data
on discontinued operations (identity of the
segment, date of disposal, etc.) should be
disclosed in a note.
7. A change from one acceptable accounting
method to another acceptable accounting
method is treated as a retroactive restate-
8.
9.
10.
11.
12.
13.
14.
15.
16.
770
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resold, copied, or distributed without the prior consent of the publisher.
PRACTICE EXERCISES
PE 141A
Income Tax Expense............................................................
Income Tax Payable........................................................
Deferred Income Tax Payable ........................................
189,000
168,000
21,000
$189,000
168,000
$ 21,000
PE 141B
Income Tax Expense............................................................
Income Tax Payable........................................................
Deferred Income Tax Payable ........................................
36,000
30,400
5,600
$ 36,000
30,400
$ 5,600
PE 142A
Dec. 15 Loss on Fixed Asset Impairment.......................
Equipment ......................................................
Restructuring Charge .........................................
Employee Termination Obligation ...............
46,000
46,000
60,000*
60,000
PE 142B
Dec. 23 Loss on Fixed Asset Impairment.......................
Land................................................................
Restructuring Charge .........................................
Employee Termination Obligation ...............
320,000
320,000
405,000*
405,000
771
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resold, copied, or distributed without the prior consent of the publisher.
PE 143A
Earnings per share:
$2,430,000 $270,000 *
= $9.00 per share
240,000
PE 143B
Earnings per share:
$350,000 $35,000 *
= $0.75 per share
420,000
PE 144A
a.
PE 144B
a.
772
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resold, copied, or distributed without the prior consent of the publisher.
PE 145A
a.
b.
$123,000
$14,000
5,600
8,400
$131,400
$151,000
$14,000
5,600
8,400
$159,400
PE 145B
a.
b.
$56,000
$6,300
2,205
4,095
$51,905
$97,500
$6,300
2,205
4,095
$93,405
PE 146A
Gilliam share of Forrester reported net income (35% $675,000)...
Less Gilliam share of the Forrester dividend (35% $155,000) .......
Increase in the investment in Forrester Company stock..................
$236,250
54,250
$182,000
PE 146B
Miranda share of Orson reported net loss (25% $300,000)............
Miranda share of the Orson dividend (25% $40,000) .....................
Decrease in the investment in Orson Company stock......................
$ 75,000
10,000
$ 85,000
773
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resold, copied, or distributed without the prior consent of the publisher.
EXERCISES
Ex. 141
Apr.
90,000
90,000
90,000
110,000*
90,000
90,000
90,000
50,000**
60,000
50,000
50,000
Ex. 142
2007
Dec. 31 Income Tax Expense ..........................................
Deferred Income Tax Payable.......................
Income Tax Payable ......................................
1,208,000
168,000*
1,040,000**
1,032,000
168,000
1,200,000*
774
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 143
2007
Dec. 31 Income Tax Expense ..........................................
Deferred Income Tax Asset................................
Income Tax Payable ......................................
91,000*
31,500
122,500**
141,750*
31,500
110,250
*$405,000 35%
Ex. 144
a.
Depreciation expense per year:
$90,000,00 0 $10,000,00 0
= $8,000,000 per year
10 years
December 31, 2008, net book value (carrying value) prior to impairment adjustment:
Fiber optic network cost ...........................................
Less accumulated depreciation ...............................
Fiber optic net book value ........................................
$ 90,000,000
16,000,000
$ 74,000,000
b.
2008
Dec. 31 Loss from Fixed Asset Impairment ...................
Fixed AssetsFiber Optic Network.............
24,000,000*
24,000,000
*$74,000,000 $50,000,000
c.
Balance sheet:
Fixed assetsFiber optic network ..........................
Less accumulated depreciation ...............................
Fixed assetsFiber optic network net book value
$ 66,000,000*
16,000,000
$ 50,000,000
*$90,000,000 $24,000,000
775
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 145
a.
2008
Dec. 31 Loss from Fixed Asset Impairment ..................... 152,000,000
Fixed AssetsBuildings and Improvements
120,000,000
Fixed AssetsLand ........................................
13,000,000
Fixed AssetsEquipment ..............................
19,000,000
b. On December 31, 2008, management determined that one of the resort properties was permanently impaired due to the discovery of an adjacent toxic
chemical waste site. Bookings to this property have dropped significantly,
and it was determined that the property had to be abandoned. As a result, a
$152 million asset impairment loss was recognized in 2008, reflecting the fair
value of assets associated with this site, as detailed in the following table:
Land .............................................
Buildings and improvements .....
Equipment....................................
Total..........................................
Original
Impairment
Fair
Loss
Value
Cost
$ 30,000,000 $ 13,000,000 $ 17,000,000
120,000,000
120,000,000
0
25,000,000
19,000,000
6,000,000
$ 175,000,000 $ 152,000,000 $ 23,000,000
776
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 146
a.
2008
Nov.
4,680,000
4,680,000
Average salary.....................................................................................
Planned number of positions to be eliminated.................................
Total annual salary eliminated......................................................
Average tenure ....................................................................................
Severance rate.....................................................................................
Total severance..............................................................................
$
65,000
180
$ 11,700,000
8 yrs.
5%
$ 4,680,000
b.
2008
Dec. 21 Employee Termination Obligation.....................
Cash................................................................
1,300,000
Average salary.....................................................................................
Number of positions eliminated.........................................................
Average tenure ....................................................................................
Severance rate.....................................................................................
Total severance paid .....................................................................
1,300,000
$ 65,000
50
8 yrs.
5%
$1,300,000
c.
Balance sheet disclosure:
Current liabilities:
Employee termination obligation
$3,380,000
Note disclosure:
On November 1, 2008, the board of directors approved a plan to eliminate 180
headquarter positions due to a decline in demand for the companys products. A
severance plan was approved and communicated to employees providing termination benefits to employees terminated between December 1, 2008, and April 1,
2009. Accordingly, a restructuring charge of $4,680,000 was recognized in 2008
for the accrued termination benefits. Of this amount, $1,300,000 was distributed
to terminated employees in 2008. The remaining $3,380,000 was recognized as a
current liability and will be paid to employees terminated during the first three
months of 2009.
777
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 147
a.
Closing and relocation costs
Employee severance costs
Contract termination costs
Total restructuring charge
600,000
3,024,000*
150,000
$ 3,774,000
180 hrs.
$14.00
$
2,520
300
$ 756,000
400%
$ 3,024,000
b.
2008
July
3,774,000
3,774,000
Note: The obligation is not employee termination obligation because there are several types of restructuring charges included in the total. Thus, the account Restructuring Obligation is used to represent the total obligation.
c.
2008
Oct. 15 Restructuring Obligation....................................
Cash................................................................
756,000
756,000
$756,000 = $3,024,000/4
d. Balance sheet disclosure:
Current liability:
Restructuring obligation
$2,268,000
778
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 147
e.
Concluded
Note disclosure:
On July 1, 2008, the board of directors of the company approved and announced a restructuring plan that resulted in a $3,774,000 charge in 2008 consisting of the following items:
Closing and relocation costs
Employee severance costs
Contract termination costs
Total restructuring charge
600,000
3,024,000
150,000
$ 3,774,000
779
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 148
a.
2008
Dec. 31 Loss from Fixed Asset Impairment ...................
Fixed AssetsTractor-Trailers ....................
13,600,000*
13,600,000
780,000*
780,000
$ 34,400,000
(14,000,000)
$ 20,400,000
Current liabilities:
Employee termination obligation ................................................
$780,000
Note disclosure:
On December 31, 2008, the board of directors approved and communicated a
restructuring plan in response to low-cost competition in the companys service market. The plan calls for the sale of 50 tractor-trailers and elimination of
50 drivers and 15 staff personnel. Due to the general overcapacity in the
transportation market, tractor-trailer market values are estimated to be 60% of
the existing book value, causing us to recognize an unrecoverable loss on
fixed asset impairment of $13,600,000 in 2008 for the entire fleet. In addition, a
severance plan was approved for the eliminated positions. The charge for
employee severance was $780,000 for 2008, all of which is currently payable
at the end of the fiscal year. It is estimated that all severance obligations will
be satisfied by the end of the first quarter in 2009.
c.
2009
Mar. 14 Employee Termination Obligation.....................
Cash................................................................
780,000
780,000
780
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Ex. 149
No. Extraordinary items are events and transactions that are unusual and occur
infrequently. It is not unusual for a company to insure the life of its president or
to receive the proceeds of the policy upon his or her death. Since it does not
meet both criteria, this gain is not an extraordinary item.
Ex. 1410
To be classified as an extraordinary item for income statement reporting purposes, the item (event) must be (1) unusual from the typical operating activities of
the business and (2) occurring infrequently. Although it would seem that the income from the Stabilization Act would meet these criteria, the airline industry (including Delta) did not report the income as an extraordinary item. Indeed, the
complete costs and income from the September 11, 2001, terrorist incident were
not accounted for as extraordinary items as explained below.
The text from the Emerging Issues Task Force, Accounting for the Impact of the
Terrorist Attacks of September 11, 2001, explains the reason for the decision:
The EITF reached a consensus that losses or costs resulting from the September
11 events should be included in the determination of income from continuing operations; thus, they should not be classified as extraordinary items. In the opinion
of the Task Force, it would not be possible to isolate the effects of the September
11 events in a single line item, because of the difficulty in distinguishing losses
that are directly attributable to such events from those that are not. Losses or
costs associated with the events of September 11 may, however, be reported as a
separate component of income from continuing operations if they are deemed to
be either unusual or infrequently occurring in nature.
In the final analysis, the Task Force reached the foregoing decision based on its
conclusion that users of financial statements would not be well served by separate reporting as an extraordinary item of only a portion of the impact of the September 11 events that strictly qualify for extraordinary classification under APB
No. 30, Reporting the Results of Operations. Pursuant to Opinion 30, only losses
or costs that can be clearly measured and irrefutably attributed to a specific event
may be shown as an extraordinary item.
The Task Force acknowledges that, while the September 11 events no doubt contributed to the pace and severity of the economic slowdown, identifying the impact of those events would be subjective and difficultif at all possible. Moreover, the Task Force points out that the most significant financial statement impact for many affected companies might be lost or reduced revenues; in accordance with Opinion 30, the measurement of an extraordinary item does not reflect
an estimate of forgone sales or income.
781
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1411
a.
The Weyerhaeuser loss was reported as extraordinary. The Mount St. Helens
eruption was deemed extraordinary because the losses from its impact were
specific and isolated. In addition, Mount St. Helens had not erupted for over
130 years, making it infrequent.
b. All losses associated with the 9/11 incident were not reported as extraordinary. See the extensive EITF (Emerging Issues Task Force) quote in Exercise
1410, which in summary states that while the incident was unusual and
infrequent, it would not be possible to limit the scope of possible losses
associated with this event. The concern was that companies would identify as
extraordinary indirect business losses as a result of the general decline in
the economy as a result of this event. In the words of the EITF, it would not
be possible to isolate the effects of the September 11 events in a single line
item, because of the difficulty in distinguishing losses that are directly
attributable to such events from those that are not.
c.
782
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1411
Concluded
Ex. 1412
a.
b.
c.
d.
NR
NR
NR
NR
e.
f.
g.
h.
NR
E
NR
E
783
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1413
WIND SURFER INC.
Income Statement
For the Year Ended June 30, 2008
Sales....................................................................................
Cost of merchandise sold .................................................
Gross profit.........................................................................
Operating expenses:
Selling expenses .........................................................
Administrative expenses ............................................
Special charges:
Loss from fixed asset impairment .............................
Restructuring charge ..................................................
Income from continuing operations before income tax
Income tax expense ...........................................................
Income from continuing operations .................................
Loss on discontinued operations, net of applicable
income tax of $32,000 .................................................
Income before extraordinary items...................................
Extraordinary item:
Gain on condemnation of land, net of applicable
income tax of $23,200 .............................................
Net income..........................................................................
Earnings per common share:
Income from continuing operations ..........................
Loss on discontinued operations..............................
Income before extraordinary item .............................
Extraordinary item ......................................................
Net income...................................................................
$ 1,100,000
467,500
$ 632,500
$125,500
104,000
229,500
120,000
50,000
233,000
93,200
139,800
48,000
91,800
34,800
126,600
$
$
$
6.99
2.40
4.59
1.74
6.33
784
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1414
1.
The order of presentation of the unusual items is incorrect. The order should
be as follows:
Income from continuing operations
Loss on discontinued operations
Income before extraordinary items
Extraordinary items
Net income
2.
3.
The fixed asset impairment should be disclosed above income from continuing operations.
4.
The earnings per share data are presented in the incorrect ordersee (1)
above.
5.
The earnings per share computations are incorrect. The amount of preferred
stock dividends ($20,000) should be subtracted from income from continuing operations, income before extraordinary item, and net income in
computing the earnings per share of common stock.
6.
785
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1414
Concluded
AUDIO AFFECTION INC.
Income Statement
For the Year Ended December 31, 2008
$967,000
578,000
$389,000
$127,000
142,000
$ 20,000
24,000
269,000
44,000
$ 76,000
40,000*
$ 36,000
(22,500)
$ 13,500
Net income..........................................................................
$ 43,500
30,000
0.32
(0.45)
(0.13)
0.60
Net income...................................................................
0.47
786
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1415
Basic earnings per share when there is preferred stock is determined as follows:
Earnings per Common Share =
Ex. 1416
a.
Retained earnings, December 31, 2007........................................
Plus net income .............................................................................
Less dividends ...............................................................................
Retained earnings, December 31, 2008........................................
$ 1,483,000
460,000
$ 1,943,000
250,000
$ 1,693,000
b.
Accumulated other comprehensive income, December 31, 2007.....
Less unrealized loss from temporary investments............................
Accumulated other comprehensive income, December 31, 2008.....
$171,000
45,000
$126,000
Ex. 1417
a.
b.
c.
d.
e.
f.
g.
h.
$75,000
$9,000
$84,000
$41,000
$104,000
$45,000
$350,000
$5,000
$250,000 $175,000
$1,000 ($8,000)
$75,000 + $9,000
$32,000 + $9,000
$100,000 + $4,000
$41,000 + $4,000
$250,000 + $100,000
$1,000 + $4,000
787
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resold, copied, or distributed without the prior consent of the publisher.
Ex. 1418
a.
MANGO CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2008
Net income.....................................................................................
Other comprehensive income:
Unrealized gain on investment portfolio, net of tax ...............
Total comprehensive income.......................................................
$150,000
55,000
$205,000
b.
MANGO CORPORATION
Stockholders Equity
December 31, 2008
Common stock ..............................................................................
Paid-in capital in excess of par value..........................................
Retained earnings .........................................................................
Accumulated other comprehensive income ...............................
Total............................................................................................
$ 35,000
350,000
585,000*
10,000**
$980,000
*$435,000 + $150,000
**($45,000) + $55,000
788
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Ex. 1419
a.
2008
Unrealized loss [10,000 shares ($20 $16)]...........
Less tax benefit on unrealized loss (40% rate).........
Unrealized loss, net of income tax benefit................
$40,000
16,000
$24,000
2009
Unrealized gain [10,000 shares ($25 $16)] ..........
Less taxes on unrealized gain (40% rate) .................
Unrealized gain, net of income tax ............................
$90,000
36,000
$54,000
Note: The tax benefit and expense give rise to temporary differences, since
gains and losses are only included for tax purposes at the time of sale.
b.
Dec. 31, 2008
Accumulated Other Comprehensive Loss
$24,000
$30,000*
Ex. 1420
a.
Marketable Securities....................................................
Cash ..........................................................................
57,000
b. Cash................................................................................
Dividend Revenue ....................................................
2,150
57,000
2,150
789
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Ex. 1421
a.
GEO-METRICS CORPORATION
Balance Sheet
December 31, 2008
Assets
Current assets:
Temporary investments in marketable securities,
at cost.......................................................................
Plus unrealized gain (net of applicable income
tax benefit of $1,200) ...............................................
$57,000
1,800*
*Computation:
Market:
M-Labs Inc.: 1,000 shares $25 .............................
Spectrum Corp.: 2,500 shares $14 ......................
Cost ($19,000 + $38,000).............................................
Unrealized gain............................................................
Taxes on unrealized gain ($3,000 40%) ..................
Unrealized gain, net of applicable tax benefit...........
$58,800
$ 25,000
35,000
$ 60,000
57,000
$ 3,000
1,200
$ 1,800
b.
GEO-METRICS CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2008
Net income...........................................................................................
Other comprehensive income:
Unrealized gain on temporary investments in marketable
securities (net of applicable income tax of $1,200).....................
Comprehensive income......................................................................
$100,000
1,800
$101,800
790
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Ex. 1422
a.
b. Cash................................................................................
Dividend Revenue ....................................................
(No entry for stock dividends; carrying
amount per share of stock is now
$163,200/4,080, or $40.)
c.
Cash................................................................................
Investment in Bat Co. Stock....................................
Gain on Sale of Investments ...................................
*(1,000 shares $53) $65
163,200*
163,200
7,000
7,000
52,935*
40,000
12,935
Ex. 1423
a.
750,000
b. Cash................................................................................
Investment in May Corp. Stock ...............................
(70,000 shares $3.80)
266,000
750,000
266,000
Ex. 1424
(in millions)
Investment in Sour Company stock, December 31, 2007 ................
Plus equity earnings in Sour Company.............................................
Less dividends received.....................................................................
Investment in Sour Company stock, December 31, 2008 ................
$135
15
4*
$146
*The Sour Company investment is accounted for under the equity method, since
there are equity earnings from this investment. Since there were no purchases or
sales of Sour Company stock, there must have been a dividend received. This
would explain how the ending balance of the investment account went from $150
to $146. Since the investment is accounted for under the equity method, the market value is not used for valuation purposes.
791
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Ex. 1425
Earnings per Share =
Price-Earnings Ratio =
Price-earnings ratio:
$72.80
= 14
$5.20
Ex. 1426
a.
Price-Earnings Ratio =
$56
, 9.7
$5.76
$51
, 13.0
$3.91
$41
, 12.7
$3.24
b. The price-earnings ratio decreased from 12.7 to 9.7, or 24% [(12.7 9.7)/12.7].
During this time frame, the U.S. economy was expanding and the demand for
oil was increasing. In addition, the price of oil was increasing. As a result,
ExxonMobil had some of the strongest net income in its history during 2005.
The price-earnings ratio grew to reflect this favorable increase in net income.
It is interesting, however, that the price-earnings ratio declined over these last
three years. Since ExxonMobil is experiencing record net income, investors
are taking a more cautious tone. That is, they are not assuming this strong
net income will necessarily continue into the future. As a result, the priceearnings ratio is actually below the general market price-earnings ratio, which
during this time was around 17.
792
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PROBLEMS
Prob. 141A
1. and 2.
Deferred Income
Tax Payable
Year
Income Tax
Deducted
on Income
Statement
Income Tax
Payments for
the Year
Year's Addition
(Deduction)
Year-End
Balance
First
Second
Third
Fourth
Total
$100,000
120,000
200,000
160,000
$580,000
$ 80,000
112,000
216,000
172,000
$580,000
$ 20,000
8,000
(16,000)
(12,000)
$
0
$20,000
28,000
12,000
0
793
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 142A
XTREME WORLD INC.
Income Statement
For the Year Ended June 30, 2008
Sales....................................................................
Cost of merchandise sold .................................
Gross profit.........................................................
Operating expenses:
Selling expenses:
Sales commissions expense.....................
Advertising expense ..................................
Depreciation expensestore equipment.
Miscellaneous selling expense .................
Total selling expenses ...........................
Administrative expenses:
Office salaries expense .............................
Rent expense..............................................
Depreciation expenseoffice equipment
Insurance expense .....................................
Miscellaneous administrative expense ....
Total administrative expenses ..............
Special charges:
Loss from fixed asset impairment ................
Restructuring charge .....................................
Total special charges.................................
Total expenses ...................................................
Income from continuing operations before
other income and expenses ..........................
Other income and expenses:
Interest expense .............................................
Income from continuing operations before
income tax ..................................................
Income tax expense ...........................................
Income from continuing operations .................
Gain on discontinued operations .....................
Less applicable income tax...............................
Income before extraordinary item.....................
Extraordinary item:
Loss from condemnation of land..................
Less applicable income tax...........................
Net income..........................................................
$ 865,000
345,000
$ 520,000
$130,000
57,000
45,000
14,000
$246,000
$ 70,000
25,000
16,000
9,000
11,000
131,000
$ 40,000
50,000
90,000
467,000
$ 53,000
18,000
$ 35,000
10,500
$ 24,500
$ 38,000
11,400
$ 24,000
7,200
26,600
$ 51,100
(16,800)
$ 34,300
794
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 142A
Concluded
$
$
$
4.90
5.32
10.22
(3.36)
6.86
795
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 143A
1.
AMANA BREAD CORPORATION
Income Statement
For the Year Ended October 31, 2008
Sales....................................................................................
Cost of merchandise sold .................................................
Gross profit.........................................................................
Operating expenses:
Selling expenses .........................................................
Administrative expenses ............................................
Loss from fixed asset impairment .............................
Restructuring charge ..................................................
Total expenses.........................................................
Income from operations ....................................................
Other expenses:
Interest expense..........................................................
Interest revenue ..........................................................
Income from continuing operations before income tax..
Income tax expense ...........................................................
Income from continuing operations .................................
Loss from discontinued operations .................................
Less applicable income tax...............................................
Income before extraordinary item.....................................
Extraordinary item:
Gain on condemnation of land...................................
Less applicable income tax........................................
Net income..........................................................................
Earnings per common share:
Income from continuing operations ..........................
Loss on discontinued operations..............................
Income before extraordinary item .............................
Extraordinary item ......................................................
Net income ...............................................................
$955,000
458,000
$497,000
$224,000
80,000
35,000
65,000
404,000
$ 93,000
$ (5,000)
4,000
$ 60,000
24,000
$ 80,000
32,000
(1,000)
$ 92,000
36,800
$ 55,200
36,000
$ 19,200
48,000
$ 67,200
$
$
$
0.49*
0.45
0.04
0.60
0.64
796
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 143A
Continued
2.
AMANA BREAD CORPORATION
Retained Earnings Statement
For the Year Ended October 31, 2008
Retained earnings, November 1, 2007........
Net income....................................................
Less dividends declared:
Cash dividends......................................
Stock dividends.....................................
Increase in retained earnings......................
Retained earnings, October 31, 2008..........
$1,277,250
$ 67,200
$ 51,000
12,000
63,000
4,200
$1,281,450
3.
AMANA BREAD CORPORATION
Balance Sheet
October 31, 2008
Assets
Current assets:
Cash .......................................................
Temporary investments in marketable
securities (at cost).............................
Less unrealized loss in temporary
investments........................................
Accounts receivable .............................
Less allowance for doubtful accounts
Notes receivable....................................
Merchandise inventory, at lower of cost
(FIFO) or market.................................
Interest receivable.................................
Prepaid expenses..................................
Total current assets ..........................
Property, plant, and equipment:
Equipment..............................................
Less accumulated depreciation...........
Total property, plant, and equipment
Intangible assets:
Patents ...................................................
Total assets ..................................................
$ 165,300
$122,000
28,000
$185,000
5,400
94,000
179,600
42,500
122,000
2,500
2,600
$
608,500
$1,958,000
465,000
1,493,000
14,000
$ 2,115,500
797
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 143A
Concluded
Liabilities
Current liabilities:
Accounts payable..................................
Employee termination obligation.........
Income tax payable ...............................
Dividends payable.................................
Deferred income taxes payable ...........
Total current liabilities ......................
Deferred credits:
Deferred income taxes payable ...........
Total liabilities ..............................................
Stockholders Equity
Paid-In capital:
Preferred 8% stock, $100 par
(10,000 shares authorized;
2,000 shares issued) .........................
$200,000
Excess of issue price over par.............
8,000
Common stock, $1 par (100,000
shares authorized; 82,000 shares
issued) ................................................
$ 82,000
Excess of issue price over par.............
451,000
From sale of treasury stock .................
Total paid-in capital...........................
Retained earnings ........................................
Deduct treasury common stock (2,000
shares at cost).......................................
Less accumulated other comprehensive
loss.........................................................
Total stockholders equity...........................
Total liabilities and stockholders
equity..................................................
47,800
45,000
11,200
12,750
5,400
$
122,150
22,900
145,050
$ 208,000
533,000
16,000
$ 757,000
1,281,450
$2,038,450
40,000
28,000
1,970,450
$ 2,115,500
798
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Prob. 144A
2006
Jan. 3
July
Dec.
2
5
2009
Jan. 2
July
220,480
Cash .....................................................................
Dividend Revenue...........................................
5,000
Cash .....................................................................
Dividend Revenue...........................................
5,400
540,000
Cash .....................................................................
Dividend Revenue...........................................
5,000
220,480
5,000
5,400
540,000
5,000
Dec. 10
31
31
Cash .....................................................................
Investment in Nichols Corporation Stock.....
Gain on Sale of Investments..........................
*800 shares $53 per share
54,260
Cash .....................................................................
Dividend Revenue...........................................
(4,160 800 = 3,360 shares;
3,360 $1.50 = $5,040).
5,040
Cash .....................................................................
Investment in Telico Inc. Stock .....................
38,000
65,000
42,400*
11,860
5,040
38,000
65,000
799
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 141B
1. and 2.
Deferred Income
Tax Payable
Year
Income Tax
Deducted
on Income
Statement
Income Tax
Payments for
the Year
First
Second
Third
Fourth
Total
$ 17,500
22,750
31,500
35,000
$106,750
$ 12,250
21,000
34,300
39,200
$106,750
Year's Addition
(Deduction)
$ 5,250
1,750
(2,800)
(4,200)
$
0
Year-End
Balance
$5,250
7,000
4,200
0
800
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 142B
ATV INC.
Income Statement
For the Year Ended March 31, 2008
Sales....................................................................
Cost of merchandise sold .................................
Gross profit.........................................................
Operating expenses:
Selling expenses:
Sales salaries expense ..............................
Advertising expense ..................................
Depreciation expensestore equipment.
Miscellaneous selling expense .................
Total selling expenses ............................
Administrative expenses:
Office salaries expense .............................
Rent expense..............................................
Depreciation expenseoffice equipment
Miscellaneous administrative expense ....
Total administrative expenses ...............
Special charges:
Loss from fixed asset impairment ................
Restructuring charge .....................................
Total special charges.................................
Total expenses ...................................................
Income from continuing operations before
other income and expenses ..........................
Other income and expenses:
Interest revenue .............................................
Income from continuing operations before
income tax ......................................................
Income tax expense ...........................................
Income from continuing operations .................
Loss from discontinued operations ...................
Less applicable income tax...............................
Income before extraordinary item.....................
Extraordinary item:
Gain on condemnation of land......................
Less applicable income tax...........................
Net income..........................................................
Earnings per share:
Income from continuing operations .............
Loss from discontinued operations .............
Income before extraordinary item.................
Extraordinary item..........................................
Net income..................................................
$2,800,000
1,640,000
$1,160,000
$160,000
36,000
145,000
25,000
$366,000
$230,000
100,000
32,000
41,000
403,000
$ 32,000
70,000
102,000
871,000
$ 289,000
25,000
$ 314,000
94,200
$ 219,800
$ 78,000
23,400
$ 54,000
16,200
54,600
$ 165,200
37,800
$ 203,000
$
$
$
10.99
(2.73)
8.26
1.89
10.15
Prob. 143B
1.
DISK N DAT CORPORATION
Income Statement
For the Year Ended August 31, 2008
Sales......................................................................................
Cost of merchandise sold ...................................................
Gross profit...........................................................................
Expenses:
Selling expenses.............................................................
Administrative expenses................................................
Loss from fixed asset impairment.................................
Restructuring charge......................................................
Total expenses ............................................................
Income from operations ......................................................
Other expenses:
Interest expense..............................................................
Interest revenue ..............................................................
Income from continuing operations before income tax....
Income tax expense .............................................................
Income from continuing operations ...................................
Loss from discontinued operations ...................................
Less applicable income tax.................................................
Income before extraordinary item.......................................
Extraordinary item:
Gain on condemnation of land ......................................
Less applicable income tax ...........................................
Net income............................................................................
Earnings per common share:
Income from continuing operations ............................
Loss on discontinued operations ................................
Income before extraordinary item................................
Extraordinary item.........................................................
Net income .................................................................
$550,000
232,000
$318,000
$ 60,000
23,000
14,000
45,000
142,000
$176,000
$ (3,000)
2,500
$ 36,000
14,400
$ 75,000
30,000
(500)
$175,500
70,200
$105,300
21,600
$ 83,700
45,000
$128,700
$
$
$
2.14*
0.48
1.66
1.00
2.66
802
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Prob. 143B
Continued
2.
DISK N DAT CORPORATION
Retained Earnings Statement
For the Year Ended August 31, 2008
Retained earnings, September 1, 2007.......
Net income....................................................
Less dividends declared:
Cash dividends......................................
Stock dividends.....................................
Increase in retained earnings......................
Retained earnings, August 31, 2008 ...........
$397,950
$128,700
$ 30,000
5,000
35,000
93,700
$491,650
3.
DISK N DAT CORPORATION
Balance Sheet
August 31, 2008
Assets
Current assets:
Cash .......................................................
Temporary investments in marketable
equity securities (at cost) .................
Plus unrealized gain .............................
Accounts receivable .............................
Less allowance for doubtful accounts
Merchandise inventory, at lower of
cost (FIFO) or market ........................
Interest receivable.................................
Prepaid expenses..................................
Total current assets ..........................
Property, plant, and equipment:
Equipment..............................................
Less accumulated depreciation...........
Total property, plant, and equipment
Intangible assets:
Patents ...................................................
Total assets ..................................................
$
$125,000
9,000
$ 28,000
2,500
87,500
134,000
25,500
87,000
500
15,900
$ 350,400
$1,350,000
145,000
1,205,000
40,000
$1,595,400
803
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 143B
Concluded
Liabilities
Current liabilities:
Accounts payable..................................
Employee termination obligation.........
Income tax payable ...............................
Dividends payable.................................
Deferred income taxes payable ...........
Total current liabilities ......................
Deferred credits:
Deferred income taxes payable ...........
Total liabilities ..............................................
12,000
30,000
21,450
7,500
4,700
$
75,650
8,100
83,750
Stockholders Equity
Paid-in capital:
Preferred 6% stock, $100 par
(30,000 shares authorized;
1,500 shares issued) .........................
$150,000
Excess of issue price over par.............
20,000 $ 170,000
Common stock, $1 par (100,000
shares authorized; 46,000 shares
issued) ................................................
$ 46,000
866,000
Excess of issue price over par.............
820,000
From sale of treasury stock .................
5,000
Total paid-in capital...........................
$1,041,000
Retained earnings ........................................
491,650
$1,532,650
Deduct treasury common stock (1,000
shares at cost).......................................
30,000
Plus accumulated other comprehensive
income....................................................
9,000
Total stockholders equity...........................
1,511,650
Total liabilities and stockholders
equity......................................................
$1,595,400
804
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resold, copied, or distributed without the prior consent of the publisher.
Prob. 144B
2006
Feb. 10
July 15
Dec. 15
2009
Jan. 3
Apr. 14
288,864
Cash .....................................................................
Dividend Revenue...........................................
8,800
Cash .....................................................................
Dividend Revenue...........................................
9,200
675,000
Cash .....................................................................
Dividend Revenue...........................................
8,800
288,864
8,800
9,200
675,000
8,800
Dec. 15
31
31
Cash .....................................................................
Loss on Sales of Investments ...........................
Investment in Mode Corporation Stock ........
31,875
3,525
Cash .....................................................................
Dividend Revenue...........................................
(8,160 1,000 = 7,160 shares;
7,160 $1.20 = $8,592).
8,592
Cash .....................................................................
Investment in Applause Inc. Stock................
12,500
97,500
35,400
8,592
12,500
97,500
805
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resold, copied, or distributed without the prior consent of the publisher.
SPECIAL ACTIVITIES
SA 141
Yes. In this case, the equity method is required because Goodyear owns enough
of the voting stock of the investee to have a significant influence over its operating and financing policies.
SA 142
1.
MERCURY SHOES INC.
Vertical Analysis of Income Statement
For the Years Ended December 31, 2008 and 2007
2008
Sales............................................................
Cost of merchandise sold .........................
Gross profit.................................................
Selling and administrative expenses........
Loss on fixed asset impairment................
Income from operations ............................
Income tax expense ...................................
Net income..................................................
2.
$510,000 100.0%
224,400
44.0
$285,600
56.0
122,400
24.0
127,500
25.0
$ 35,700
7.0
14,280
2.8
$ 21,420
4.2%
2007
$430,000 100.0%
193,500
45.0
$236,500
55.0
107,500
25.0
0.0
$129,000
30.0
51,600
12.0
$ 77,400
18.0%
The operating income is 30% of sales in 2007 but only 7% of sales in 2008.
Net income dropped from $77,400 to $21,420. This would seem to indicate a
large reduction in performance in 2008. However, the loss on the fixed asset
impairment, which is unusual, is 25% of sales. Without this loss, the income
from operations would have been 32% of sales, or 2 points better than 2007.
Combining this with growing sales from $430,000 to $510,000 would indicate
that the company is doing well on a recurring basis.
There is some concern that management was unable to successfully complete the software project. Order management is an important capability for a
retailer, so this event should not be completely ignored. The loss clearly indicates a failed effort at meeting an important operational objective. This need
is still outstanding, will require future effort, and may limit future growth.
However, the financial numbers would seem to indicate that the recurring, or
core, earnings and growth are on track.
806
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.
SA 143
a.
The other comprehensive income or loss for the period is the difference in
the accumulated other comprehensive income (loss) shown on the balance
sheet [($170) ($131)] between the two comparative periods, or a $39 other
comprehensive loss.
SA 144
No. Although Dillon will not be lying about the amount of total earnings per share
of $1.05, it would be clearly misleading not to identify the impact of the extraordinary gain of $0.20 related to the selling of the land. In addition to being unethical
and unprofessional, Dillon may violate federal securities laws if he sells his stock
after the announcement. In this case, it might be alleged that Dillon traded on insider information for his own profit.
807
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.
SA 145
To be classified as an extraordinary item, an event must meet both of the following requirements:
a.
808
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resold, copied, or distributed without the prior consent of the publisher.
SA 146
Note to Instructors: The purpose of this activity is to familiarize students with extraordinary items and discontinued operations reported by real companies and to
determine the impact of these items on earnings per share.
The following is an example from Reynolds American Inc.s comparative income
statements, beginning with income for continuing operations before taxes:
Reynolds American Inc.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in Millions, Except Per Share Amounts)
For the Years Ended
December 31,
2005
2004
2003
Income (loss) from continuing operations before
income taxes..................................................................
Provision for (benefit from) income taxes .......................
Income (loss) from continuing operations..................
Discontinued operations:
Gain on sale of discontinued businesses, net of
income taxes (2005$1; 2004$6; 2003$97).....
Income (loss) before extraordinary item.................
Extraordinary itemgain on acquisition .........................
Net income (loss) ......................................................
$ 1,416
431
985
$ 829
202
627
$(3,918)
(229)
(3,689)
2
987
55
$ 1,042
12
639
49
$ 688
122
(3,567)
121
$(3,446)
$ 6.68
0.01
0.38
$ 7.07
$ 5.66
0.111.46
0.44
$ 6.21
$(44.08)
1.45
$(41.17)
809
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.