Intermediate Accounting: Answers

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BRIEF EXERCISE 4-1

STARR CO.|
Income Statement|
For the Year 2012|
Revenues| | |
Sales revenue| | $540,000|
| | |
Expenses| | |
Cost of goods sold| | $330,000|
Salaries and wages expense| | 120,000|
Other operating expenses| | 10,000|
Income tax expense| | 25,000|
Total expenses| | 485,000|
| | |
Net income| | $55,000|
| | |
Earnings per share| | $0.55*|

*$55,000 ÷ 100,000 shares.

Note: The increase in value of the company reputation and the unrealized gain on the value of patents are not reported.

BRIEF EXERCISE 4-5

Income before income tax and extraordinary
item| |
$6,300,000|
Income tax expense| | 1,890,000|
Income before extraordinary item| | 4,410,000|
Extraordinary item—loss from casualty| $770,000| | Less: Applicable income tax| 231,000| 539,000| Net income| | $3,871,000|
Earnings per share| | |
Income before extraordinary item| | $0.88*|
Extraordinary loss, net of tax| |  (0.11)*|
Net income| | $0.77|
*Rounded

BRIEF EXERCISE 4-10

PORTMAN CORPORATION|
Retained Earnings Statement|
For the Year Ended December 31, 2012|
Retained earnings, January 1, as reported| | $ 675,000| Correction for overstatement of expenses in
prior period (net of tax)| | 80,000|
Retained earnings, January 1, as adjusted| | 755,000| Add:Net income| | 1,400,000|
| | 2,155,000|
Less: Cash dividends| | 75,000|
Retained earnings, December 31| | $2,080,000|

EXERCISE 4-1

Computation of net income| | |
Change in assets:| $69,000 + $45,000 + $127,000 – $47,000 = $194,000 Increase| Change in liabilities:| $ 82,000 – $51,000 = 31,000 Increase| Change in stockholders’ equity:| $163,000 Increase|

| | |
Change in stockholders’ equity accounted
for as follows:| | |
Net increase| | $163,000|
Increase in common stock| $125,000| |
Increase in additional paid-in capital| 13,000| | Decrease in retained earnings due to
dividend declaration|
(24,000)| |
Net increase accounted for| | 114,000|
Increase in retained earnings due to net
income| |
$ 49,000|

EXERCISE 4-3
DUNBAR INC.|
Income Statement|
For Year Ended December 31, 2012|
Revenues| | |
Net sales ($1,125,000(b) – $17,000)| | $1,108,000| Expenses| | |
Cost of goods sold| $500,000| |
Selling expenses| 360,000(c)| |
Administrative expenses| 90,000(a)| |
Interest expense| 20,000| |
Total expenses| | 970,000|
Income before income tax| | 138,000|
Income tax| | 41,400|
Net income| | $ 96,600|
Earnings per share (d)| | $3.22*|

Rounded

Determination of amounts

(a)Administrative expenses| =| 18% of cost of good sold| | =| 18% of $500,000|
| =| $90,000|
| | |
(b)Gross sales X 8%| =| administrative expenses|
| =| $90,000 ÷ 8%|
| =| $1,125,000|
| | |
(c)Selling expenses| =| four times administrative expenses.| | | (operating expenses consist of selling|
| | and administrative expenses; since |
| | selling expenses are 4/5 of operating |
| | expenses, selling expenses are |
| | 4 times administrative expenses.)|
| =| 4 X $90,000|
| =| $360,000|
| | |
(d)Earnings per share $3.22 ($96,600 ÷ 30,000)|
EXERCISE 4-5

PARNEVIK CORP.|
Income Statement|
For the Year Ended December 31, 2012|
Sales Revenue| | |
Sales revenue| |...
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