Week 6 Exercise Solutions [PDF]

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THOMPSON CORPORATION Trial Balance Year Ended December 31, 2010 Debits Credits Purchase Discounts £10,000 Cash £189,700 Accounts Receivable 105,000 Rent Revenue 18,000 Retained Earnings 160,000 Salaries Payable 18,000 Sales 1,100,000 Notes Receivable 110,000 Accounts Payable 49,000 Accumulated Depreciation-Equip 28,000 Sales Discounts 14,500 Sales Returns 17,500 Notes Payable 70,000 Selling Expenses 232,000 Administrative Expenses 99,000 Common Stock 300,000 Income Tax Expense 53,900 Cash Dividends 45,000 Allowance for Doubtful Accounts 5,000 Supplies 14,000 Freight-in 20,000 Land 70,000 Equipment 140,000 Bonds Payable 100,000 Gain on Sale of Land 30,000 Accumulated Depreciation-Bldg 19,600 Merchandise Inventory 89,000 Building 98,000 Purchases 610,000 Totals £1,907,600 £1,907,600 A physical count of inventory on December 31 resulted in an inventory amount of of goods sold for 2010 is £645,000



£64,000



Instructions: Prepare an 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.



Problem 4-3 Solution, Page 1 of 6, 03/28/2021, 23:47:19



30,000



shares ordinary shares were outstanding the entire year. THOMPSON CORPORATION Income Statement Year Ended December 31, 2010 Net sales (£1.100.000 - £14.500 - £17.500) Cost of goods sold Gross profit Selling Expenses Administrative Expenses Other income and expense Gain on sale of land Rent revenues Income before income taxes Income Tax Expense Net income



£1,068,000 645,000 423,000 £232,000 99,000



30,000 18,000



Earnings per share (£86.100 ÷ 30.000 shares) Computation of cost of goods sold: Can be verified as follows: Merchandise inventory, Jan. 1 Purchases £610,000 Less: Purchase discounts 10,000 Net purchases 600,000 Add: Freight-in 20,000 Merchandise available for sale Less: merchandise inventory, Dec. 31 Cost of goods sold



Less: Cash dividends declared and paid Retained earnings, December 31,



48,000 140,000 53,900 £86,100 £2.87



£89,000



620,000 709,000 64,000 £645,000



THOMPSON CORPORATION Statement of Retained Earnings Year Ended December 31, 2010 Retained earnings January 1, Add: Net income



331,000 92,000



£160,000 86,100 246,100 45,000 £201,100



Problem 4-3 Solution, Page 2 of 6, 03/28/2021, 23:47:19



Name: Exercise: Course: Date:



Solution E4-12, Retained Earnings Statement (20-25 minutes)



McEntire Corporation began operations on January 1, 2007. During its first 3 years of operations, McEntire reported net income and declared dividends as follows. Year 2007 2008 2009



Net income $40,000 125,000 160,000



Dividends declared $0 50,000 50,000



The following information relates to 2010: Income before income taxes Prior period adjustment: Understatement of 2008 depreciation expense. (Before taxes) Cumulative decrease in income from change in inventory methods (before taxes) Dividends declared Of the dividends declared to date, the amount that will be paid on Jan 15, 2011 is: Effective tax rate



$220,000 $25,000 $45,000 $100,000 $25,000 20%



Instructions: (a) Prepare a 2010 retained earnings statement for McEntire Corporation. McENTIRE CORPORATION Retained Earnings Statement For the Year Ended December 31, 2010 Balance, January 1, as reported ($40.000 + $125.000 + $160.000 - $50.000 - $50.000) Correction for depreciation error (net of $25.000, - 20% tax rate or $5.000 tax) Cumulative decrease in income from change in inventory methods (net of $45.000 - 20% tax or $9.000 tax) Balance, January 1, as adjusted Add: Net income [$220.000 - ($220.000 × 20%)] Deduct dividends declared Balance, December 31



$225,000 (20,000) (36,000) 169,000 176,000 345,000 100,000 $245,000



(b) Assume McEntire Corp. restricted retained earnings in the amount of $70,000 on December 31, 2010. After this action, what would McEntire report as total retained earnings in its December 31, 2010, statement of financial position? Total retained earnings would still be reported as $245.000. A restriction does not affect total retained earnings; it merely labels part of the retained earnings as being unavailable for dividend distribution. Retained earnings would be reported as follows: Retained earnings Appropriated Unappropriated



$70,000 175,000



Exercise 4-12 Solution, Page 3 of 6, 03/28/2021, 23:47:19



Total



$245,000



Exercise 4-12 Solution, Page 4 of 6, 03/28/2021, 23:47:19



Name: Problem: Course: Date:



Solution P4-4, Income Statement Items



Maher Inc. reported income from continuing operations before taxes during 2010 of $790,000 Additional transactions occurring in 2010 but not considered in the $790,000 are as follows: 1. The corporation experienced an uninsured flood loss in the amount of $90,000 during the year. $54,000 residual value of 2. At the beginning of 2008, the corporation purchased a machine for $9,000 that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2008, 2009, and 2010 but failed to deduct the residual value in computing the depreciation base. $47,000 3. Sale of securities held as part of its portfolio resulted in a gain of $115,000 before taxes. 4. The corporation disposed of its recreational division at a loss of Assume that this transaction meets the criteria for discontinued operations. 5. 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 2008 income by $60,000 and decrease 2009 income by $20,000 before taxes. The FIFO method has been used for 2010. Instructions: Prepare an income statement for the year 2010, starting with income before income tax. Compute earnings per share as it should be shown on the face of the income statement. Ordinary shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items.) MAHER INC. Income Statement (Partial) For the Year Ended December 31, 2010 Income before income tax Income tax ($748.500 × 0,30) Income from continuing operations: Discontinued operations: Loss from disposal of recreational division $115,000 Less: Applicable income tax reduction 34,500 Net income Earnings per share Income from operations Discontinued operations, net of tax Net income per share ($443.450 ÷ 120.000 shares) Computation of income tax: As previously stated Uninsured flood loss Gain on sale of securities Error in computation of depreciation As computed ($54.000÷ 6 years) Corrected (($54.000 – $9.000) ÷ 6 years) As restated



$748,500 224,550 523,950



80,500 $443,450



$4.37 ($0.67) $3.70



$790,000 (90,000) 47,000 $9,000 (7,500)



Note: No adjustment is needed for the inventory method change, since the new method is reported in 2010 income. The cumulative effect on prior years of retroactive application of new inventory method will be recorded in retained earnings.



Problem 4-4 Solution, Page 5 of 6, 03/28/2021, 23:47:19



1,500 $748,500



Name: Exercise: Course: Date:



Solution E5-7, Current Assets Section of the Statement of Financial Position



Presented below are selected accounts of Aramis Company at December 31, 2010. Finished Goods Revenue Received in Advance Equipment Work-in-Process Cash Trading Securities Customer Advances Cash Restricted for Plant Expansion



€ 52,000 90,000 253,000 34,000 42,000 31,000 36,000 50,000



Cost of Goods Sold Notes Receivable Accounts Receivable Raw Materials Supplies Expense Allowance for Doubtful Accounts Licenses Share Premium - Ordinary Treasury Stock



€ 2,100,000 40,000 161,000 187,000 60,000 12,000 18,000 88,000 22,000



The following additional information is available: 1. Inventories are valued at lower of cost or market using FIFO. 2. Equipment is recorded at cost. Accumulated depreciation, computed on a straight-line basis, is € 29,000 3. The trading securities have a fair value of 4. The notes receivables are due April 30, 2012, with interest receivable every April 30. The notes bear interest at 6% (Hint: Accrue interest due on December 31, 2010.) 5. The allowance for doubtful accounts applies to the accounts receivable. Accounts receivable of are pledged as collateral on a bank loan. € 14,000 6. Licenses are recorded net of accumulated amortization of 7. Treasury shares are recorded at cost.



€ 50,600



€ 50,000



Instructions: Prepare the current assets section of Aramis Company’s December 31, 2010, statement of financial position, with appropriate disclosures. Current assets Inventories at lower of cost (determined using FIFO) or net-realizable-value Finished goods Work-in-process Raw materials Accounts receivable (of which €50.000 is pledged as collateral on a bank loan) Less allowance for doubtful accounts Interest receivable [(€40.000 × 6,00%) × 8/12] Trading securities at fair value (cost, €31.000) Cash Less: Cash restricted for plant expansion Total current assets



€ 52,000 34,000 187,000 161,000 (12,000)



€ 92,000 (50,000)



€ 273,000



149,000 1,600 29,000 € 42,000 € 494,600



Note: An acceptable alternative is to report cash at €42.000 and simply report the cash restricted for plant expansion in the investments section.



Exercise 5-7 Solutions, Page 6 of 6, 03/28/2021, 23:47:20