Income Statement Other Items
Hard Test
Hard Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. the ability to predict future income
b. consistency
c. full disclosure
d. representational faithfulness
Answer
a. reportable segment
b. operating segment
c. reporting unit
d. equity investments
Answer
a. extraordinary item
b. other revenue or expense
c. operating gain or loss
d. other comprehensive income
Answer
a. the assets were sold in the current year at a loss
b. the assets have a book value less than the fair market value
c. the assets are considered part of an operating component that is held for sale and book value is greater than fair market value
d. impairment losses are never reported for discontinued operations
Answer
a. foreign currency gains and losses
b. gains and losses related to employee pensions
c. gains and losses related to derivatives
d. gains and losses from the sale of operating assets
Answer
a. how well management achieved the expected earnings
b. the change in earnings from one year to the next
c. budget compared to actual earnings
d. how well earnings represent the true economic results of operations during the period
Answer
a. management continues to manage the operating unit for the new owners
b. the operating unit is not material to the operations of the company
c. the operating unit is material and has separately generated cash flows
d. closing a manufacturing plant and combining the operations with another plant
Answer
a. extraordinary items
b. other revenue or expense
c. operating income or expense
d. reimbursable costs
Answer
a. full disclosure
b. comparability
c. entity
d. reliability
Answer
a. income from discontinued operations
b. impairment losses
c. net of tax presentation
d. the value reported
Answer
Sales $1,000,000 - Cost of Goods Sold $ 300,000 Gross Profit $ 700,000 - Selling Expense $ 120,000 - Administrative Expense $ 180,000 Income from Operations $ 400,000 Other Revenues and Expenses: Research and Development $ 100,000 Income from Discontinued Operations $ 115,000 Loss on Impairment of Assets $ 20,000 Gain on sale of Discontinued Operations $ 145,000 Income Before Tax $ 540,000 Tax Expense $ 162,000 Net Income $ 378,000 Earnings Per Share $3.78
Prepare an income statement in proper format.
Answer
Sales $1,000,000 OK - Cost of Goods Sold $ 300,000 OK Gross Profit $ 700,000 OK - Selling Expense $ 120,000 OK - Administrative Expense $ 180,000 OK Income from Operations $ 400,000 OK Other Revenues and Expenses: Research and Development $ 100,000 Operating expense Income from Discontinued Operations $ 115,000 After ICO, net of tax Loss on Impairment of Assets $ 20,000 Operating expense Gain on sale of Discontinued Operations $ 145,000 After ICO, net of tax Income Before Tax $ 540,000 Tax Expense $ 162,000 computes to 30% Net Income $ 378,000 Earnings Per Share $3.78 report for CO and DO
2nd Reorder the income statement:
Sales $1,000,000 - Cost of Goods Sold $ (300,000) Gross Profit $ 700,000 - Selling Expense $ (120,000) - Administrative Expense $ (180,000) - Research and Development $ (100,000) - Loss on Impairment of Assets $ (20,000) Income from Operations $ 280,000 Tax Expense $ (84,000) Income from Continuing Operations $ 196,000 Discontinued Operations: Income from Discontinued Operations, net of tax $34,500 $ 80,500 Gain on sale of Discontinued Operations, net of tax $43,500 $ 101,500 Total Discontinued Operations $ 182,000 Net Income $ 378,000 Earnings Per Share: Continuing Operations $1.96 Discontinued Operations $1.82 Net Income $3.78
Sales 1,000,000 - Cost of Goods Sold 200,000 Gross Profit 800,000 - Operating Expenses, net 400,000 Operating Income 400,000 Tax Expense 80,000 Net Income 320,000
The auditors who reviewed the Company’s transactions noticed the following items that were not included in net income:
a. A separately managed division of the company is held for sale.
After tax loss from operations for this division is $120,000. Impairment of assets
related to the sale is $50,000 net of tax.
b. A loss from a warehouse located next to the Mississippi river that flooded was $100,000 after tax.
c. The Company had an average of 50,000 common shares outstanding during the year. $25,000 preferred dividends were declared and paid.
Use the above information to restate the income statement in proper format.
Answer
The tax rate is 20%
40,000 tax / 200,000 income before tax is 20%
a. A division of the company that manages cash flows separately is held for sale.
After tax loss from operations for this division is $120,000. Impairment of assets
related to the sale is $50,000 net of tax.
This qualifies as a component that is separately reportable since cash flows are monitored separately. Both items must be reported separately as part of discontinued operations, net of tax.
The before tax amount would be: $150,000 and $62,500
$150,000 – 30,000 tax at 20% = 120,000
$ 62,500 – 12,500 tax at 20% = 50,000
c. A loss from a hurricane in a Florida warehouse was $100,000 after tax.
The before tax amount would be: $125,000
$125,000 – 25,000 tax at 20% = 100,000
Restate the income statement as follows:
Sales 1,000,000 - Cost of Goods Sold 200,000 Gross Profit 800,000 - Operating Expenses, net 400,000 Operating Income 400,000 Other Revenues/(Expenses) (125,000) Income Before Tax 275,000 Tax Expense (55,000) Income from Continuing Op. 220,000 Discontinued Operations: Loss from oper, net of 30,000 (120,000) Impairment loss, net of 12,500 (50,000) Net Income (Loss) 50,000 Earnings Per Share: Continuing Operations $3.90 Discontinued Operations ($3.40) Net Income $ 0.50
Net Income – Preferred dividends
$220,000 – $25,000 = $195,000 / 50,000 shares = $3.90
$(170,000) / 50,000 = ($3.40)
$25,000 / 50,000 = $0.50
a. Administrative employees were down sized and severance in the amount of $39,000 net of tax was paid during this year. An additional $60,000 net of tax is expected to be paid next year to employees laid off during the current year.
b. Two manufacturing facilities are held for sale. They are part of an operating division that produces one product line in 4 manufacturing facilities. Income from operations for the facilities held for sale was $150,000 in the current year. An impairment loss on the assets held for sale was determined to be $60,000. Severance costs after the sale of
the facilities is expected to be $29,000. All amounts are before tax.
c. Bad debt expense was increased by $100,000 related to sales that occurred two years ago.
d. The income tax rate is 30%. The Company has 200,000 shares of common stock
outstanding.
Prepare the income statement in proper form beginning with Income before tax.
Answer
a. Administrative employees were down sized and severance in the amount of $39,000 net of tax was paid during this year. An additional $60,000 net of tax is expected to be paid next year to employees laid off during the current year.
This is a restructuring expense reported as other revenue/expense before income from continuing operations
Only amounts incurred in the current period is reported in the current period. Both payments were incurred this period as the layoff occurred this year.
Report before tax: 99,000 / .7 = 141,429 before tax
b. Two manufacturing facilities are held for sale. They are part of an operating division that produces one product line in 4 manufacturing facilities. Income from operations for the facilities held for sale was $150,000 in the current year. An impairment loss on the assets held for sale was determined to be $60,000. Severance costs after the sale of
the facilities is expected to be $29,000. All amounts are before tax.
This does not qualify to be separately reported as a discontinued operation since the company will remain in this line of business. The impairment loss should be reported under other revenues and expenses.
Report before tax:
60,000 loss on impairment
29,000 restructuring expense
c. Bad debt expense was increased by $100,000 related to sales that occurred two years ago.
This is a change in estimate which is reported in the current year as an additional operating expense.
Adjustment to income before tax:
Previous amount: 2,100,000 Restructuring (a.) (141,429) Restructuring (b.) (29,000) Impairment loss (a.) (60,000) Bad debt expense (c.) (100,000) Adjusted Income before Tax: 1,769,571
Report on Income Statement:
Income Before Tax 1,769,571 Tax Expense 530,871 Net Income 1,238,700 Earnings per share $6.19