Practice Sheet For Class

Q1.
Multiple-step income statement

Presented below is information that relates to Muffin Limited for 2020:
Collections of credit sales............................................................................................. $1,100,000
Retained earnings, January 1, 2020.............................................................................. 800,000
Sales............................................................................................................................. 1,900,000
Selling and administrative expenses............................................................................. 290,000
Casualty loss (pre-tax).................................................................................................. 350,000
Cash dividends declared on common shares................................................................. 34,000
Cost of goods sold........................................................................................................ 1,100,000
Loss resulting from calculation error on depreciation charge in 2018 (pre-tax)............ 460,000
Other revenues.............................................................................................................. 180,000
Other expenses.............................................................................................................. 120,000
Loss from early extinguishment of debt (pre-tax)......................................................... 340,000
Gain from transactions in foreign currencies (pre-tax)................................................. 220,000
Proceeds from sale of Muffin common shares.............................................................. 60,000
Additional information:
1. Early in 2020, Muffin changed depreciation methods for its plant assets from the double- declining-
balance to the straight-line method. The affected assets were purchased at the beginning of 2015 for
$200,000, had no residual value, and had useful lives of 10 years. Depreciation expense of $20,000 is
included in the selling and administrative expenses of $290,000.
2. On September 1, 2020, Muffin sold one of its segments (product line) to Best Industries for a gain
(pre-tax) of $550,000. During the period January 1 to August 31, the discontinued segment incurred
an operating loss (pre-tax) of $480,000. This loss is not included in any of the numbers shown above.
3. Included in selling and administrative expenses is bad debts expense of $19,000. Muffin bases its
bad debts expense upon a percentage of sales. In 2018 and 2019, the percentage was 0.5 %. In 2020,
the percentage was changed to 1%.
Instructions
In good form, prepare a multiple-step income statement for 2020. Assume a 20% income tax rate and that
20,000 common shares were outstanding during the year.
Solution
MUFFIN LIMITED
Income Statement
For the Year Ended December 31, 2020
Sales................................................................................................................. $1,900,000
Cost of goods sold............................................................................................ 1,100,000
Gross profit...................................................................................................... 800,000
Selling and administrative expenses................................................................. 290,000
Operating income............................................................................................. 510,000
Other revenues and gains
Other revenues.......................................................................................... $180,000
Gain from transactions in foreign currency.............................................. 220,000 400,000
910,000
Other expenses and losses
Other expenses......................................................................................... 120,000
Early extinguishment of debt.................................................................... 340,000
Casualty loss............................................................................................. 350,000 810,000
Income from continuing operations before tax................................................. 100,000
Income tax................................................................................................ 20,000
Income from continuing operations................................................................. 80,000
Discontinued operations:
Loss from operations (net of taxes of $96,000)........................................ (384,000)
Gain from sale of assets (net of taxes of $110,000).................................. 440,000 56,000
Net income....................................................................................................... $ 136,000
Earnings per share:

Income from continuing operations.......................................................... $4.00
Discontinued operations........................................................................... 2.80
Net income............................................................................................... $6.80
Q2. Single-step income statement
The information below relates to the operations of Konun Corporation for the year ended December 31,
2020:
Cost of goods sold $84,500

Interest expense 585
Sales returns and allowances 2,240
Accounts payable 30,032
Sales discounts 960
Depreciation expense 71,148
Sales revenue 245,586
Salaries and wages 40,895
Prepaid expenses 875
Rent expense 9,500
Loss due to fire 2,092
Rental revenue 6,000
 The effective tax rate is 30%.

 Depreciation expense: 60% administrative expense and 40% selling expense
 Salaries and wages: 35% administrative expense and 65% selling expense
 Rent expense: 75% administrative expense and 25% selling expense
Prepare a single-step income statement in good form by nature (round to the nearest dollar).
Solution
Konun Corporation
Income Statement
Revenues
Net revenue (245,586-2,240-960) $242,386
Rental revenue 6,000
Total revenues 248,386
Expenses
Cost of goods sold 84,500
Depreciation expense 71,148
Salaries and wages 40,895
Rent expense 9,500
Loss due to fire 2,092
Interest expense 585
Total expenses 208,720
Net income before tax 39,666

Income tax expense 11,900
Net income $27,766
Q3. Cupcake Corporation maintains its records on the cash basis. You have been engaged to convert its
cash-basis income statement to the accrual basis. The cash-basis income statement, along with additional
information, follows:
CUPCAKE CORPORATION
Income Statement (Cash Basis)
Cash receipts from customers.......................................................................... $380,000

Cash payments:
Wages....................................................................................................... $150,000
Taxes........................................................................................................ 65,000
Insurance.................................................................................................. 40,000
Interest...................................................................................................... 25,000 280,000
Net income....................................................................................................... $100,000
_Balances at Dec. 31
2020 2019
Accounts receivable................................................................................. $50,000 $30,000
Wages payable.......................................................................................... 15,000 25,000
Taxes payable........................................................................................... 14,000 19,000
Prepaid insurance..................................................................................... 8,000 4,000
Accumulated depreciation........................................................................ 95,000 80,000
Interest payable........................................................................................ 3,000 9,000
No assets were sold during 2020.
Solution
CUPCAKE CORPORATION
Income Statement (Accrual Basis)
Revenue ($380,000 + $50,000 – $30,000)....................................................... $400,000

Expenses
Wages ($150,000 + $15,000 – $25,000)................................................... $140,000
Taxes ($65,000 + $14,000 – $19,000)...................................................... 60,000
Insurance ($40,000 + $4,000 – $8,000).................................................... 36,000
Depreciation ($95,000 – $80,000)............................................................ 15,000
Interest ($25,000 + $3,000 – $9,000)........................................................ 19,000
Total expenses.................................................................................. 270,000
Net income....................................................................................................... $130,000

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Q1.

Multiple-step income statement

Earnings per share:

Q2. Single-step income statement

Cost of goods sold $84,500

 The effective tax rate is 30%.

Net income before tax 39,666

Net income $27,766

Cash receipts from customers.......................................................................... $380,000

No assets were sold during 2020.

Revenue ($380,000 + $50,000 – $30,000)....................................................... $400,000

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