c04BProblems.

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B PROBLEMS
3

P4-1B (Multiple-Step Income, Retained Earnings) Presented below is information related to Marlin
Company for 2014.
Retained earnings balance, January 1, 2014
Sales revenue
Cost of goods sold
Interest revenue
Selling and administrative expenses
Write-off of goodwill
Income taxes for 2014
Loss on the sale of investments (normal recurring)
Loss due to hurricane damageextraordinary item (net of tax)
Gain on the disposition of the retail division (net of tax)
Loss on operations of the retail division (net of tax)
Dividends declared on common stock
Dividends declared on preferred stock

$ 2,250,000
53,000,000
33,000,000
120,000
8,900,000
2,100,000
3,650,000
53,000
1,100,000
23,000
231,000
350,000
125,000

Instructions
Prepare a multiple-step income statement and a retained earnings statement. Marlin Company decided to
discontinue its entire retail operations and to retain its manufacturing and wholesale operations. On September 15, Marlin sold the retail operations to Shark Corp. During 2014, there were 700,000 shares of common stock outstanding all year.
2
6

P4-2B (Single-Step Income, Retained Earnings, Periodic Inventory) Presented below is the trial balance
of Dunn Corporation at December 31, 2014.
DUNN CORPORATION
TRIAL BALANCE
DECEMBER 31, 2014
Debits
Cash
Accounts Receivable
Rent Revenue
Retained Earnings
Sales Returns and Allowances
Salaries and Wages Payable
Common Stock
Sales Revenue
Accumulated DepreciationEquipment
Purchase Discounts
Sales Discounts
Notes Receivable
Notes Payable

6,000
100,000
2,250,000
31,000
16,000
9,400
5,000
75,000
235,000
311,000
15,000

Supplies
Freight-in
Land
Equipment
Income Tax Expense
Cash Dividends
Allowance for Doubtful Accounts
Bonds Payable
Accounts Payable

13,000
8,000
80,000
165,000
91,900
60,000

Totals

65,000
132,,500

21,600

Inventory
Selling Expenses
Loss on Sale of Land
Accumulated DepreciationBuildings
Administrative Expenses

Buildings
Purchases

Credits

25,200
175,000

33,600
138,000

15,000
200,000
136,000
212,000
1,430,000
$2,995,100

$2,995,100

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2 Chapter 4 Income Statement and Related Information

A physical count of inventory on December 31 resulted in an inventory amount of $196,000; thus, cost of
goods sold for 2014 is $1,461,000.
Instructions
Prepare a single-step income statement and a retained earnings statement. Assume that the only changes
in retained earnings during the current year were from net income and dividends. One hundred thousand
shares of common stock were outstanding the entire year.
4

P4-3B (Irregular Items) Vanpop Inc. reported income from continuing operations before taxes during
2014 of $463,000. Additional transactions occurring in 2014 but not considered in the $463,000 are as
follows.
1. The corporation experienced an uninsured hurricane loss (extraordinary) in the amount of $130,000
during the year. The tax rate on this item is 40%.
2. At the beginning of 2012, the corporation purchased equipment for $62,000 (salvage value of $6,000)
that had a useful life of 10 years. The bookkeeper used straight-line depreciation for 2012, 2013, and
2014 but incorrectly used a 7 year useful life in determining the deprecation amount.
3. Sale of securities held as a part of its portfolio resulted in a gain of $40,000 (pretax).
4. When its chairman of the board died, the corporation realized $500,000 from an insurance policy. The
cash surrender value of this policy had been carried on the books as an investment in the amount of
$410,000 (the gain is nontaxable).
5. The corporation disposed of its consumer division at a loss of $210,000 before taxes. Assume that this
transaction meets the criteria for discontinued operations.
6. The corporation decided to change its method of inventory pricing from average cost to the FIFO
method. The effect of this change on prior years is to increase 2012 income by $86,000 and increase
2013 income by $43,000 before taxes. The FIFO method has been used for 2014. The tax rate on these
items is 40%.
Instructions
Prepare an income statement for the year 2014 starting with income from continuing operations before taxes.
Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 200,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

P4-4B (Multiple- and Single-Step Income, Retained Earnings) The following account balances were included in the trial balance of Castle Corporation at June 30,2014.
Sales revenue
Sales discounts
Cost of goods sold
Salaries and wages expense (sales)
Sales commissions
Travel expense (salespersons)
Freight-out
Entertainment expense
Telephone and Internet expense (sales)
Depreciation expense (sales equipment)
Maintenance and repairs expense (sales)
Miscellaneous expenses (sales)
Office supplies used
Telephone and Internet expense
(administration)

$2,100,500
12,680
1,490,300
54,600
135,800
41,600
31,100
21,930
11,300
3,500
2,900
6,570
2,900
4,900

Depreciation expense (office furniture

and equipment)
Property tax expense
Bad debt expense (selling)
Maintenance and repairs
expense (administration)
Office expense
Sales returns and allowances
Dividends received
Interest expense
Income tax expense
Depreciation overstatement
due to error-2012 (net of tax)
Dividends declared on
preferred stock
Dividends declared on common
stock

$ 8,680
12,900
8,630
4,860
7,500
36,870
21,000
37,500
68,000
31,000
15,000
45,000

The Retained Earnings account had a balance of $468,000 at July 1, 2013. There are 150,000 shares of common stock outstanding.
Instructions
(a) Using the multiple-step form, prepare an income statement and a retained earnings statement for
the year ended June 30, 2014.
(b) Using the single-step form, prepare an income statement and a retained earnings statement for the
year ended June 30, 2014.

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B Problems 3
4

P4-5B (Irregular Items) Presented below is a combined single-step income and retained earnings statement for OFD Company for 2014.
Net sales
Costs and expenses
Cost of goods sold
Selling, general, and administrative expenses
Other, net

$860,000
$ 600,000
121,000
12,000

Income before income tax

Income tax
Net income
Retained earnings at beginning of period, as previously reported
Adjustment required for correction of error

733,000
127,000
43,400
84,600

210,000
11,000

Retained earnings at beginning of period, as restated

Dividends on common stock

231,000
(52,500)

Retained earnings at end of period .

$263,100

Additional facts are as follows.

1. Selling, general, and administrative expenses for 2014 included a charge of $11,000,000 that was
usual but infrequently occurring.
2. Other, net for 2014 included an extraordinary item (gain) of $8,500,000. If the extraordinary item
(charge) had not occurred, income taxes for 2014 would have been $40,200,000 instead of $43,400,000.
3. Adjustment required for correction of an error was a result of a change in estimate (useful life of
certain assets reduced to 8 years and a catch-up adjustment made).
4. OFD Company disclosed earnings per common share for net income in the notes to the financial
statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the OFD Company income
and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
3

P4-6B (Retained Earnings Statement, Prior Period Adjustment) Below is the Retained Earnings account
for the year 2014 for Cooper Corp.
Retained earnings, January 1 , 2014
Add:
Gain on discontinued operations (net of tax)
Net income
Gain on sale of investments (net of tax)
Cumulative effect on income of prior years in changing from
LIFO to FIFO inventory valuation in 2014 (net of tax)
Refund on litigation with government, related to the year 2011
(net of tax)
Recognition of income earned in 2013 , but omitted from income
statement in that year (net of tax)

$616,050
$ 12,000
168,300
41,200
52,600
51,600
49,700

375,400
991,450

Deduct:
Write-off of goodwill (net of tax)
Cash dividends declared
Retained earnings, December 31 , 2014

250,000
60,000

310,000
$681,450

Instructions
(a) Prepare a corrected retained earnings statement. Cooper Corp. normally sells investments of the
type mentioned above. FIFO inventory was used in 2014 to compute net income..
(b) State where the items that do not appear in the corrected retained earnings statement should be shown.

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4 Chapter 4 Income Statement and Related Information

4

P4-7B (Income Statement, Irregular Items) Rafter Corp. has 400,000 shares of common stock outstanding. In 2014, the company reports income from continuing operations before income tax of $2,680,000. Additional transactions not considered in the $2,680,000 are as follows.
1. In 2014, Rafter Corp. sold available-for-sale investments for $86,000. The investments had originally
cost $80,000. The gain or loss is considered ordinary.
2. The company discontinued operations of one of its subsidiaries during the current year at a loss of
$450,000 before taxes. Assume that this transaction meets the criteria for discontinued operations.
The loss from operations of the discontinued subsidiary was $390,000 before taxes; the loss from
disposal of the subsidiary was $60,000 before taxes.
3. An internal audit discovered that deprecition of equipment was overstated by $40,000 (net of tax) in
a prior period. The amount was charged against retained earnings.
4. The company had a loss of $60,000 on the condemnation of much of its property. The loss is taxed
at a total effective rate of 40%. Assume that the transaction meets the requirements of an extraordinary item.
Instructions
Analyze the above information and prepare an income statement for the year 2014, starting with income from
continuing operations before income tax. Compute earnings per share as it should be shown on the face of the
income statement. (Assume a total effective tax rate of 30% on all items, unless otherwise indicated.)