Chapter 4 Exercise Solutions

EXERCISE 4-10 (35-40 minutes)

(a) Gottlieb Corp.

Statement of Comprehensive Income
For the Year Ended December 31, 2017

Sales revenue
Net sales revenue $1,300,000
Cost of goods sold 780,000
Gross profit 520,000

Operating expenses
Selling expenses $65,000
Administrative expenses 48,000 113,000
Income from operations 407,000

Other revenues and gains

Dividend revenue 20,000
Interest income 7,000 27,000
434,000
Other expenses and losses
Loss on inventory due to decline in net
realizable value 80,000
Loss on sale of equipment 35,000
35,000
Loss from expropriation 60,000 175,000

Income before income tax 259,000

Income tax 64,750
Net income 194,250
Other comprehensive income
Items that may be reclassified subsequently
to net income or loss:
Unrealized gain on FV-OCI investments
(net of $10,500 income tax) 31,500
Comprehensive income $225,750
EXERCISE 4-10 (CONTINUED)

(b) Gottlieb Corp.

Excerpt from Statement of Changes in Equity
For the Year Ended December 31, 2017

Retained earnings balance, January 1, as reported $ 980,000

Correction for overstatement of net income in prior
period (depreciation error) (net of tax of $13,750) (41,250)
Balance, January 1, as restated 938,750
Add: Net income 194,250
1,133,000
Less: Dividends declared 45,000
Retained earnings balance, December 31 $1,088,000

(c)
Retained Earnings…………………. 41,250
Income Tax Payable/Receivable… 13,750
Accumulated Depreciation…… 55,000

(d)

Under ASPE, other comprehensive income is not recognized. All

investments designated as fair value through OCI (FV-OCI) under
IFRS would be accounted for as fair value through net income (FV-
NI) under ASPE as long as they trade in an active market. Under
ASPE, the unrealized gain on FV-OCI investments of $42,000 would
be included in net income for the year ended December 31, 2017. As
well, all previously recognized unrealized gains/(losses) on the
related investments would have been recorded in net income and
closed to retained earnings in those prior years. This would result in
a different balance in retained earnings at December 31, 2016.
EXERCISE 4-12 (30-35 minutes)

(a) Multiple-Step Format

P. Bride Company
Income Statement
For the Year Ended December 31, 2017
(In thousands, except earnings per share)

Sales revenue $ 96,500

Cost of goods sold 60,570

Gross profit 35,930

Operating expenses
Selling expenses
Sales commissions $ 7,980
Depreciation - sales equipment 6,480
Delivery 2,690 $ 17,150
Administrative expenses
Officers’ salaries 4,900
Depreciation - office furniture
and equipment 3,960 8,860 26,010
Income from operations 9,920

Other revenues and gains

Rent revenue 17,230
27,150
Other expenses and losses
Interest expense 1,860

Income before income tax 25,290

Income tax 9,070
Net income $16,220

Earnings per share $0.53*

*($16,220  30,550)
EXERCISE 4-12 (CONTINUED)

(b) Single-Step Format

P. Bride Company
Income Statement
For the Year Ended December 31, 2017
(In thousands, except earnings per share)

Revenues
Sales revenue $ 96,500
Rent revenue 17,230
Total revenues 113,730

Expenses
Cost of goods sold 60,570
Selling expenses 17,150
Administrative expenses 8,860
Interest expense 1,860
Total expenses 88,440

Income before income tax 25,290

Income tax 9,070
Net income $16,220

Earnings per share $0.53

(c) An investor interested in information about operating vs.

non-operating items would prefer the multiple-step format
because income from operations is calculated before other
revenues and gains are added and before other expenses and
losses are subtracted, to arrive at net income. Both income
statement formats show the same amount of income before
income tax and net income. However, the single-step formats
tend to be more straightforward, requiring no judgement in
allocating revenues and expenses between operating and non-
operating categories. Further, it does not imply priority of one
revenue or expense over another. The multiple-step format
matches expenses with related revenue and tends to require
more judgement.
 PROBLEM 4-10

SITUATION 1:
DC 5 Ltd.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2017

Sales revenue ($7,300,000 - $1,500,000) $5,800,000

Cost of goods sold ($3,700,000 - $750,000) 2,950,000
Gross profit 2,850,000
Selling, general and administrative expenses
($2,300,000 - $580,000 - $790,000) 930,000
Income from operations 1,920,000
Other expenses and losses
Loss from tornado ($630,000 + $270,000*) 900,000
Income before income tax and discontinued
operations 1,020,000
Income tax 306,000
Income before discontinued operations 714,000
Discontinued operations
Income from operations of apparel
division ** (net of tax of $51,000) $119,000
Loss from disposal of apparel division
(net of tax of $237,000) 553,000 434,000
Net income 280,000
Retained earnings, January 1 1,250,000
Retained earnings, December 31 $1,530,000

*Tax on ($630,000 ÷ [100% - 30%]) X 30% = $270,000

** $1,500,000 - $750,000 - $580,000 = $170,000
PROBLEM 4-10 (CONTINUED)

SITUATION 2:
DC 5 Ltd.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2017

Sales revenue $7,300,000

Cost of goods sold 3,700,000
Gross profit 3,600,000
Selling, general and administrative expenses* 2,402,200
Income from operations 1,197,800
Other losses:
Loss from tornado ($630,000 + $270,000) 900,000
Income before income tax 297,800
Income tax 89,340
Net income 208,460
Retained earnings, January 1 1,250,000
Retained earnings, December 31 $1,458,460

* The amount recorded as bad debt expense represents

the 1.2% rate
($87,600 / $7,300,000 = 1.2%)
Revised bad debt expense = $7,300,000 X 2.6% = $189,800
Bad debt expense recorded to date 87,600
Increase in bad debt expense $102,200
PROBLEM 4-10 (CONTINUED)

SITUATION 3:
DC 5 Ltd.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2017

Sales revenue $7,300,000

Cost of goods sold 3,700,000
Gross profit 3,600,000
Selling, general and administrative expenses* 2,300,000
Income from operations 1,300,000
Other expenses:
Loss from tornado ($630,000 + $270,000) 900,000
Income before income tax 400,000
Income tax 120,000
Net income 280,000
Retained earnings, January 1 1,250,000

Retained earnings, December 31 $1,530,000

*Note: change in method of depreciation is a change in estimate and

is accounted for prospectively.