Test Bank Chapter 4 Income Statement and Related Information.

Test Bank Chapter 4 Income Statement and Related Information. CHAPTER 4 INCOME STATEMENT AND RELATED INFORMATION IFRS questions are available at the end of this chapter. TRUE-FALSe—Conceptual Answer No. Description T 1. Usefulness of the income statement. F 2. Limitations of the income statement. F 3. Earnings management. T 4. Transaction approach of income measurement. T 5. Single-step income statement. T 6. Revenues and gains. F 7. Multiple-step vs. single-step income statement. F 8. Multiple-step income statement. T 9. Multiple-step vs. single-step income statement. F 10. Current operating performance approach. T 11. Reporting discontinued operations. F 12. Reporting extraordinary items. F 13. Irregular items. T 14. Intraperiod tax allocation. F 15. Reporting earnings per share. F 16. Computation of earnings per share. T 17. Prior period adjustments. F 18. Retained earnings restrictions. F 19. Comprehensive income definition. T 20. Reporting other comprehensive income. Multiple Choice—Conceptual Answer No. Description c 21. Elements of the income statement. d 22. Usefulness of the income statement. b 23. Limitations of the income statement. d S24. Use of an income statement. d S25. Income statement reporting. c 26. Income statement information. b 27. Example of managing earnings down. c 28. Example of managing earnings up. b 29. Improving current net income. a 30. Decreasing current net income. d 31. Single-step income statement advantage. b 32. Single-step income statement. d 33. Methods of preparing income statements. a 34. Income statement presentation. b 35. Event with no income statement effect. c S36. Net income effect. Multiple Choice—Conceptual (cont.) Answer No. Description b P37. Selling expenses. b P38. Reporting merchandise inventory. a 39. Definition of an extraordinary item. d 40. Classification of an extraordinary item. d 41. Identification of an extraordinary item. a 42. Identification of an extraordinary item. d 43. Identification of an extraordinary item. a 44. Presentation of unusual or infrequent items. d 45. Identification of a change in accounting principle. d 46. Classification of extraordinary items. c 47. EPS disclosures on income statement. c 48. Reporting discontinued operations. c S49. Reporting unusual or infrequent items. d 50. Intraperiod tax allocation. d 51. Purpose of intraperiod tax allocation. c 52. Intraperiod tax allocation. d 53. Reporting items net of tax. d 54. Reporting items at gross amount. c 55. Earnings per share disclosure. d 56. EPS disclosures on income statement. d 57. EPS disclosures on income statement. c S58. Earnings per share disclosure. d P59. Reporting correction of an error. c 60. Retained earnings statement. d 61. Prior period adjustment. d 62. Identification of a prior period adjustment. b 63. Reporting EPS amounts. c 64. Reporting EPS on financial statements. b 65. Comprehensive income inclusion. a 66. Displaying comprehensive income. d 67. Comprehensive income disclosure method. c 68. Comprehensive income items. c 69. Providing information about components of comprehensive income. Multiple Choice—Computational Answer No. Description a 70. Calculate total revenues. c 71. Calculate total expenses. a 72. Single-step income statement. c 73. Multiple-step income statement. c 74. Multiple-step income statement. c 75. Calculation of net sales. a 76. Presentation of gain on sale of plant assets. a 77. Extraordinary items. a 78. Extraordinary items. a 79. Calculate income before extraordinary items. c 80. Calculate income before taxes and extraordinary items. Multiple Choice—Computational (cont.) b 81. Calculate extraordinary loss. a 82. Events affecting income from continuing operations. b 83. Calculation of events affecting net income. c 84. Disposal of a major business component. c 85. Tax effect on irregular items. c 86. Tax effect on irregular items. b 87. Calculate income tax expense. a 88. Calculate income tax expense. a 89. Calculate income tax expense. b 90. Calculate earnings per share. d 91. Calculate EPS for extraordinary loss. d 92. Calculate earnings per share. c 93. Earnings per share. c 94. Earnings per share. a 95. Retained earnings statement. b 96. Retained earnings statement. c 97. Retained earnings statement. d 98. Retained earnings statement. d 99. Calculate balance of retained earnings. d 100. Calculate other comprehensive income. a 101. Calculate comprehensive income. c 102. Calculate ending Accumulated Other Comprehensive Income. c 103. Calculate ending Retained Earnings balance. a 104. Calculate total stockholders' equity. P Note: these questions also appear in the Problem-Solving Survival Guide. S Note: these questions also appear in the Study Guide. Multiple Choice—CPA Adapted Answer No. Description d 105. Calculate selling expenses. a 106. Calculate general and administrative expenses. a 107. Calculate selling expenses. a 108. Calculate general and administrative expenses. d 109. Calculate cost of goods manufactured. c 110. Calculate income before extraordinary item. a 111. Determine extraordinary loss. b 112. Determine infrequent gains not extraordinary. a 113. Determine infrequent losses not extraordinary. b 114. Identification of prior period adjustment. Exercises Item Description E4-115 Definitions. E4-116 Terminology. E4-117 Income statement disclosures. E4-118 Calculate net income from change in stockholders’ equity. E4-119 Calculate net income from change in stockholders’ equity. E4-120 Income statement classifications. E4-121 Income statement relationships. E4-122 Multiple-step income statement. E4-123 Classification of income and retained earnings statement items. PROBLEMS Item Description P4-124 Multiple-step income statement. P4-125 Income statement form. P4-126 Multiple-step income statement. P4-127 Single-step income statement. P4-128 Income statement and retained earnings statement. P4-129 Irregular items and financial statements. CHAPTER LEARNING OBJECTIVES 1. Understand the uses and limitations of an income statement. 2. Prepare a single-step income statement. 3. Prepare a multiple-step income statement. 4. Explain how to report irregular items. 5. Explain intraperiod tax allocation. 6. Identify where to report earnings per share information. 7. Prepare a retained earnings statement. 8. Explain how to report other comprehensive income. SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1 1. TF 4. TF 23. MC 26. MC 29. MC 116. E 119. E 2. TF 21. MC S24. MC 27. MC 30. MC 117. E 3. TF 22. MC S25. MC 28. MC 115. E 118. E Learning Objective 2 5. TF 31. MC 70. MC 72. MC 6. TF 32. MC 71. MC 127. P Learning Objective 3 7. TF 34. MC P38. MC 76. MC 108. MC 121. E 126. P 8. TF 35. MC 73. MC 105. MC 109. MC 122. E 128. P 9. TF S36. MC 74. MC 106. MC 110. MC 123. E 33. MC P37. MC 75. MC 107. MC 120. E 124. P Learning Objective 4 10. TF 41. MC 47. MC 80. MC 110. MC 123. E 11. TF 42. MC 48. MC 81. MC 111. MC 124. P 12. TF 43. MC S49. MC 82. MC 112. MC 125. P 13. TF 44. MC 77. MC 83. MC 113. MC 126. P 39. MC 45. MC 78. MC 84. MC 115. E 127. P 40. MC 46. MC 79. MC 108. MC 116. E 128. P Learning Objective 5 14. TF 52. MC 85. MC 88. MC 124. P 127. P 50. MC 53. MC 86. MC 89. MC 125. P 128. P 51. MC 54. MC 87. MC 116. E 126. P Learning Objective 6 15. TF 55. MC S58. MC 92. MC 115. E 127. P 16. TF 56. MC 90. MC 93. MC 124. P 128. P 47. MC 57. MC 91. MC 94. MC 126. P Learning Objective 7 17. TF 60. MC 63. MC 96. MC 99. MC 116. E 128. P 18. TF 61. MC 64. MC 97. MC 114. MC 123. E P59. MC 62. MC 95. MC 98. MC 115. E 127. P Learning Objective 8 19. TF 65. MC 67. MC 69. MC 101. MC 103. MC 20. TF 66. MC 68. MC 100. MC 102. MC 104. MC Note: TF = True-False E = Exercise MC = Multiple Choice P = Problem TRUE-FALSE—Conceptual 1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows. 2. A strength of the income statement as compared to the balance sheet is that items that cannot be measured reliably can be reported in the income statement. 3. Earnings management generally makes income statement information more useful for predicting future earnings and cash flows. 4. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period. 5. Companies frequently report income tax expense as the last item before net income on a single-step income statement. 6. Both revenues and gains increase both net income and owners’ equity. 7. Use of a multiple-step income statement will result in the company reporting a higher net income than if they used a single-step income statement. 8. The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another. 9. Gross profit and income from operations are reported on a multiple-step but not a single-step income statement. 10. The accounting profession has adopted a current operating performance approach to income reporting. 11. Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations. 12. Gains or losses from exchange or translation of foreign currencies are reported as extraordinary items. 13. Discontinued operations, extraordinary items, and unusual gains and losses are all reported net of tax in the income statement. 14. Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision. 15. A company that reports a discontinued operation or an extraordinary item has the option of reporting per share amounts for these items. 16. Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share. 17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement. 18. Companies only restrict retained earnings to comply with contractual requirements or current necessity. 19. Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners. 20. The components of other comprehensive income can be reported in a statement of stockholders’ equity. True False Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. 1. T 6. T 11. T 16. F 2. F 7. F 12. F 17. T 3. F 8. F 13. F 18. F 4. T 9. T 14. T 19. F 5. T 10. F 15. F 20. T MULTIPLE CHOICE—Conceptual 21. The major elements of the income statement are a. revenue, cost of goods sold, selling expenses, and general expense. b. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect. c. revenues, expenses, gains, and losses. d. all of these. 22. Information in the income statement helps users to a. evaluate the past performance of the enterprise. b. provide a basis for predicting future performance. c. help assess the risk or uncertainty of achieving future cash flows. d. all of these. 23. Limitations of the income statement include all of the following except a. items that cannot be measured reliably are not reported. b. only actual amounts are reported in determining net income. c. income measurement involves judgment. d. income numbers are affected by the accounting methods employed. S24. Which of the following would represent the least likely use of an income statement prepared for a business enterprise? a. Use by customers to determine a company's ability to provide needed goods and services. b. Use by labor unions to examine earnings closely as a basis for salary discussions. c. Use by government agencies to formulate tax and economic policy. d. Use by investors interested in the financial position of the entity. S25. The income statement reveals a. resources and equities of a firm at a point in time. b. resources and equities of a firm for a period of time. c. net earnings (net income) of a firm at a point in time. d. net earnings (net income) of a firm for a period of time. 26. The income statement information would help in which of the following tasks? a. Evaluate the liquidity of a company. b. Evaluate the solvency of a company c. Estimate future cash flows d. Estimate future financial flexibility 27. Which of the following is an example of managing earnings down? a. Changing estimated bad debts from 3 percent to 2.5 percent of sales. b. Revising the estimated life of equipment from 10 years to 8 years. c. Not writing off obsolete inventory. d. Reducing research and development expenditures. 28. Which of the following is an example of managing earnings up? a. Decreasing estimated salvage value of equipment. b. Writing off obsolete inventory. c. Underestimating warranty claims. d. Accruing a contingent liability for an ongoing lawsuit. 29. What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income? a. Increase research and development activities. b. Relax credit policies for customers. c. Delay shipments to customers until after the end of the fiscal year. d. Delay purchases from suppliers until after the end of the fiscal year. 30. What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income? a. Delay shipments to customers until after the end of the fiscal year. b. Relax credit policies for customers. c. Pay suppliers all amounts owed. d. Delay purchases from suppliers until after the end of the fiscal year. 31. Which of the following is an advantage of the single-step income statement over the multiple-step income statement? a. It reports gross profit for the year. b. Expenses are classified by function. c. It matches costs and expenses with related revenues. d. It does not imply that one type of revenue or expense has priority over another. 32. The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement. d. the various components of income from continuing operations. 33. Which of the following is an acceptable method of presenting the income statement? a. A single-step income statement b. A multiple-step income statement c. A consolidated statement of income d. All of these 34. Which of the following is not a generally practiced method of presenting the income statement? a. Including prior period adjustments in determining net income b. The single-step income statement c. The consolidated statement of income d. Including gains and losses from discontinued operations of a component of a business in determining net income 35. The occurrence which most likely would have no effect on 2012 net income (assuming that all amounts involved are material) is the a. sale in 2012 of an office building contributed by a stockholder in 1983. b. collection in 2012 of a receivable from a customer whose account was written off in 2011 by a charge to the allowance account. c. settlement based on litigation in 2012 of previously unrecognized damages from a serious accident which occurred in 2010. d. worthlessness determined in 2012 of stock purchased on a speculative basis in 2008. S36. The occurrence that most likely would have no effect on 2012 net income is the a. sale in 2012 of an office building contributed by a stockholder in 1961. b. collection in 2012 of a dividend from an investment. c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. d. stock purchased in 1996 deemed worthless in 2012. P37. Which of the following is not a selling expense? a. Advertising expense b. Office salaries expense c. Freight-out d. Store supplies consumed P38. The accountant for the Lintz Sales Company is preparing the income statement for 2012 and the balance sheet at December 31, 2012. The January 1, 2012 merchandise inventory balance will appear a. only as an asset on the balance sheet. b. only in the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet. d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet. 39. In order to be classified as an extraordinary item in the income statement, an event or transaction should be a. unusual in nature, infrequent, and material in amount. b. unusual in nature and infrequent, but it need not be material. c. infrequent and material in amount, but it need not be unusual in nature. d. unusual in nature and material, but it need not be infrequent. 40. Classification as an extraordinary item on the income statement would be appropriate for the a. gain or loss on disposal of a component of the business. b. substantial write-off of obsolete inventories. c. loss from a strike. d. none of these. 41. Which of these is generally an example of an extraordinary item? a. Loss incurred because of a strike by employees. b. Write-off of deferred marketing costs believed to have no future benefit. c. Gain resulting from the devaluation of the U.S. dollar. d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot. 42. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes? a. Only if floods in the geographical area are unusual in nature and occur infrequently. b. Only if the flood damage is material in amount and could have been reduced by prudent management. c. Under any circumstances as an extraordinary item. d. Flood damage should never be classified as an extraordinary item. 43. An item that should be classified as an extraordinary item is a. write-off of goodwill. b. gains from transactions involving foreign currencies. c. losses from moving a plant to another city. d. gains from a company selling the only investment it has ever owned. 44. How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? a. Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if deemed appropriate. b. Shown in operating revenues or expenses if material but not shown as a separate item. c. Shown net of income tax after ordinary net earnings but before extraordinary items. d. Shown net of income tax after extraordinary items but before net earnings. 45. Which of the following is a change in accounting principle? a. A change in the estimated service life of machinery b. A change from FIFO to LIFO c. A change from straight-line to double-declining-balance d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance 46. Which of the following is never classified as an extraordinary item? a. Losses from a major casualty. b. Losses from an expropriation of assets. c. Gain on a sale of the only security investment a company has ever owned. d. Losses from exchange or translation of foreign currencies. 47. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? a. The gain or loss on disposal should be reported as an extraordinary item. b. Results of operations of a discontinued component should be disclosed immediately below extraordinary items. c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement. d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations. 48. When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as a. a prior period adjustment. b. an extraordinary item. c. an amount after continuing operations and before extraordinary items. d. a bulk sale of plant assets included in income from continuing operations. S49. A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement Net of Tax Disclosed Separately a. No No b. Yes Yes c. No Yes d. Yes No 50. Income taxes are allocated to a. extraordinary items. b. discontinued operations. c. prior period adjustments. d. all of these. 51. Which of the following is true about intraperiod tax allocation? a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments. c. Its purpose is to allocate income tax expense evenly over a number of accounting periods. d. Its purpose is to relate the income tax expense to the items which affect the amount of tax. 52. Companies use intraperiod tax allocation for all of the following items except a. Discontinued operations. b. Extraordinary items. c. Changes in accounting estimates. d. Income from continuing operations. 53. Which of the following items would be reported net of tax on the face of the income statement? a. Prior period adjustment b. Unusual gain c. Cumulative effect of a change in an accounting principle d. Discontinued operations 54. Which of the following items would be reported at its gross amount on the face of the income statement? a. Extraordinary loss b. Prior period adjustment c. Cumulative effect of a change in an accounting principle d. Unusual gain 55. Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles? a. On the face of the statement of retained earnings (or, statement of stockholders' equity.) b. In the footnotes to the financial statements. c. On the face of the income statement. d. Either (a) or (c). 56. Which of the following earnings per share figures must be disclosed on the face of the income statement? a. EPS on income from continuing operations. b. The effect on EPS from operations of a discontinued division, net of taxes. c. The effect on EPS from an extraordinary item, net of taxes. d. All of the above. 57. Which of the following earnings per share figures must be disclosed on the face of the income statement? a. EPS for income before taxes. b. The effect on EPS from unusual items. c. EPS for gross profit. d. EPS for income from continuing operations. S58. Earnings per share should always be shown separately for a. net income and gross margin. b. net income and pretax income. c. income before extraordinary items. d. extraordinary items and prior period adjustments. P59. A correction of an error in prior periods' income will be reported In the income statement Net of tax a. Yes Yes b. No No c. Yes No d. No Yes 60. Which of the following items will not appear in the retained earnings statement? a. Net loss b. Prior period adjustment c. Discontinued operations d. Dividends 61. Which one of the following types of losses is excluded from the determination of net income in income statements? a. Material losses resulting from transactions in the company's investments account. b. Material losses resulting from unusual sales of assets not acquired for resale. c. Material losses resulting from the write-off of intangibles. d. Material losses resulting from correction of errors related to prior periods. 62. Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as a. an increase in depreciation expense for the year in which the error is discovered. b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements. c. an extraordinary item for the year in which the error was made. d. a prior period adjustment. 63. A company is not required to report a per share amount on the face of the income statement for which of the following items? a. Net income b. Prior period adjustment c. Extraordinary item d. Discontinued operations 64. Earnings per share data are required on the face of which of the following financial statements? a. Statement of retained earnings b. Statement of stockholders' equity c. Income statement d. Balance sheet 65. Which of the following is included in comprehensive income? a. Investments by owners. b. Unrealized gains on available-for-sale securities. c. Distributions to owners. d. Changes in accounting principles. 66. Which of the following is not an acceptable way of displaying the components of other comprehensive income? a. Combined statement of retained earnings b. Second income statement c. Combined statement of comprehensive income d. As part of the statement of stockholders' equity 67. Which disclosure method do most companies use to display the components of other comprehensive income? a. Combined statement of retained earnings b. Second income statement c. Combined statement of comprehensive income d. As part of the statement of stockholders' equity 68. Comprehensive income includes all of the following except a. dividend revenue. b. losses on disposal of assets. c. investments by owners. d. unrealized holding gains. 69. The approach most companies use to provide information related to the components of other comprehensive income is a a. second separate income statement. b. combined income statement of comprehensive income. c. separate column in the statement of changes in stockholders’ equity. d. footnote disclosure. Multiple Choice Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 21. c 28. c 35. b 42. a 49. c 56. d 63. b 22. d 29. b 36. c 43. d 50. d 57. d 64. c 23. d 30. a 37. b 44. a 51. d 58. c 65. b 24. d 31. d 38. b 45. d 52. c 59. d 66. a 25. d 32. b 39. a 46. d 53. d 60. c 67. d 26. c 33. d 40. d 47. c 54. d 61. d 68. c 27. b 34. a 41. d 48. c 55. c 62. d 69. c Solution to Multiple Choice question for which the answer is “none of these.” 40. Many answers are possible. Multiple Choice—Computational 70. Ortiz Co. had the following account balances: Sales revenue $ 180,000 Cost of goods sold 90,000 Salaries and wages expense 15,000 Depreciation expense 30,000 Dividend revenue 6,000 Utilities expense 12,000 Rent revenue 30,000 Interest expense 18,000 Sales returns and allow. 16,500 Advertising expense 19,500 What would Ortiz report as total revenues in a single-step income statement? a. $199,500 b. $ 15,000 c. $216,000 d. $180,000 71. Ortiz Co. had the following account balances: Sales revenue $ 180,000 Cost of goods sold 90,000 Salaries and wages expense 15,000 Depreciation expense 30,000 Dividend revenue 6,000 Utilities expense 12,000 Rent revenue 30,000 Interest expense 18,000 Sales returns and allow. 16,500 Advertising expense 19,500 What would Ortiz report as total expenses in a single-step income statement? a. $190,500 b. $201,000 c. $184,500 d. $ 94,500 72. For Mortenson Company, the following information is available: Cost of goods sold $120,000 Dividend revenue 5,000 Income tax expense 12,000 Operating expenses 46,000 Sales revenue 200,000 In Mortenson’s single-step income statement, gross profit a. should not be reported. b. should be reported at $27,000. c. should be reported at $80,000. d. should be reported at $85,000. 73. For Mortenson Company, the following information is available: Cost of goods sold $120,000 Dividend revenue 5,000 Income tax expense 12,000 Operating expenses 46,000 Sales revenue 200,000 In Mortenson’s multiple-step income statement, gross profit a. should not be reported b. should be reported at $27,000. c. should be reported at $80,000. d. should be reported at $85,000. 74. For Rondelli Company, the following information is available: Cost of goods sold $270,000 Dividend revenue 12,000 Income tax expense 27,000 Operating expenses 105,000 Sales revenue 450,000 In Rondelli's multiple-step income statement, gross profit a. should not be reported b. should be reported at $60,000. c. should be reported at $180,000. d. should be reported at $192,000. 75. Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were a. $12,720,000. b. $12,350,000. c. $12,175,000. d. $12,035,000. 76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related taxes of $500,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as a. a gain of $1,640,000 and an increase in income tax expense of $500,000. b. operating income net of applicable taxes, $1,140,000. c. a prior period adjustment net of applicable taxes, $1,140,000. d. an extraordinary item net of applicable taxes, $1,140,000. 77. Manning Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income taxes, what total amount should Manning Company report as extraordinary losses? a. $ -0-. b. $555,000. c. $699,000. d. $894,000. 78. Garwood Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000. Ignoring income taxes, what total amount should Garwood Company report as extraordinary losses? a. $339,000 b. $555,000. c. $699,000. d. $894,000. 79. An income statement shows “income before income taxes and extraordinary items” in the amount of $2,740,000. The income taxes payable for the year are $1,440,000, including $480,000 that is applicable to an extraordinary gain. Thus, the “income before extraordinary items” is a. $1,780,000. b. $820,000. c. $1,860,000. d. $900,000. 80. Dole Company, with an applicable income tax rate of 30%, reported net income of $350,000. Included in income for the period was an extraordinary loss from flood damage of $50,000 before deducting the related tax effect. The company's income before income taxes and extraordinary items was a. $400,000. b. $500,000. c. $550,000. d. $385,000. 81. A review of the December 31, 2012, financial statements of Somer Corporation revealed that under the caption "extraordinary losses," Somer reported a total of $1,030,000. Further analysis revealed that the $1,030,000 in losses was comprised of the following items: (1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment formerly used in the business. (2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a result of hurricane damage to a warehouse. (3) During 2012, several factories were shut down during a major strike by employees, resulting in a loss of $170,000. (4) Uncollectible accounts receivable of $60,000 were written off as uncollectible. Ignoring income taxes, what amount of loss should Somer report as extraordinary on its 2012 income statement? a. $300,000. b. $500,000. c. $800,000. d. $1,030,000. 82. At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%. (1) Depreciation for 2010 was found to be understated by $60,000. (2) A strike by the employees of a supplier resulted in a loss of $50,000. (3) The inventory at December 31, 2010 was overstated by $80,000. (4) A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area. The effect of these events and transactions on 2012 income from continuing operations net of tax would be a. ($35,000). b. ($77,000). c. ($133,000). d. ($833,000). 83. At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%. (1) Depreciation for 2010 was found to be understated by $60,000. (2) A strike by the employees of a supplier resulted in a loss of $50,000. (3) The inventory at December 31, 2010 was overstated by $80,000. (4) A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area. The effect of these events and transactions on 2012 net income net of tax would be a. ($35,000). b. ($735,000). c. ($777,000). d. ($833,000). 84. During 2012, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of $1,800,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were $2,100,000 in 2012. How should these facts be reported in Lopez's income statement for 2012? Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations a. $2,100,000 loss $1,800,000 gain b. 300,000 loss 0 c. 0 300,000 loss d. 1,800,000 gain 2,100,000 loss 85. Sandstrom Corporation has an extraordinary loss of $150,000, an unusual gain of $105,000, and a tax rate of 40%. At what amount should Sandstrom report each item? Extraordinary loss Unusual gain a. $(150,000) $105,000 b. (150,000) 63,000 c. (90,000) 105,000 d. (90,000) 63,000 86. Prophet Corporation has an extraordinary loss of $600,000, an unusual gain of $420,000, and a tax rate of 40%. At what amount should Prophet report each item? Extraordinary loss Unusual gain a. $(600,000) $420,000 b. (600,000) 252,000 c. (360,000) 420,000 d. (360,000) 252,000 87. Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $464,000. It also has the following items (gross amounts). Unusual loss $ 74,000 Extraordinary loss 202,000 Gain on disposal of equipment 16,000 Change in accounting principle increasing prior year's income 106,000 What is the amount of income tax expense Arreaga would report on its income statement? a. $185,600 b. $162,400 c. $198,400 d. $124,000 88. Palomo Corp has a tax rate of 30 percent and income before non-operating items of $714,000. It also has the following items (gross amounts). Unusual gain $ 46,000 Loss from discontinued operations 366,000 Dividend revenue 12,000 Income increasing prior period adjustment 148,000 What is the amount of income tax expense Palomo would report on its income statement? a. $231,600 b. $121,800 c. $166,200 d. $217,800 89. Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what would be the income tax expense reported on the face of the income statement? Sales revenue $ 300,000 Cost of goods sold 180,000 Salaries and wages expense 24,000 Depreciation expense 33,000 Dividend revenue 27,000 Utilities expense 3,000 Extraordinary loss 30,000 Interest expense 6,000 a. $32,400 b. $20,400 c. $21,600 d. $ 9,600 90. In 2012, Esther Corporation reported net income of $600,000. It declared and paid preferred stock dividends of $150,000 and common stock dividends of $60,000. During 2012, Esther had a weighted average of 200,000 common shares outstanding. Compute Esther's 2012 earnings per share. a. $1.95 b. $2.25 c. $3.00 d. $3.75 91. In 2012, Linz Corporation reported an extraordinary loss of $1,000,000, net of tax. It declared and paid preferred stock dividends of $100,000 and common stock dividends of $300,000. During 2012, Linz had a weighted average of 400,000 common shares outstanding. Compute the effect of the extraordinary loss, net of tax, on earnings per share. a. $1.50 b. $1.75 c. $2.25 d. $2.50 92. In 2012, Benfer Corporation reported net income of $280,000. It declared and paid common stock dividends of $32,000 and had a weighted average of 70,000 common shares outstanding. Compute the earnings per share to the nearest cent. a. $3.54 b. $2.80 c. $3.60 d. $4.00 93. Benedict Corporation reports the following information: Net income $750,000 Dividends on common stock 210,000 Dividends on preferred stock 90,000 Weighted average common shares outstanding 100,000 Benedict should report earnings per share of a. $4.50. b. $5.40 c. $6.60. d. $7.50. 94. Norling Corporation reports the following information: Net income $750,000 Dividends on common stock 210,000 Dividends on preferred stock 90,000 Weighted average common shares outstanding 200,000 Norling should report earnings per share of a. $2.25. b. $2.70 c. $3.30. d. $3.75. 95. Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 645,000 Dividends declared 480,000 Net income 1,500,000 Retained earnings, 1/1/12, as reported 3,000,000 Moorman should report retained earnings, 1/1/12, as adjusted at a. $2,355,000. b. $3,000,000. c. $3,645,000. d. $4,665,000. 96. Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 645,000 Dividends declared 480,000 Net income 1,500,000 Retained earnings, 1/1/12, as reported 3,000,000 Moorman should report retained earnings, 12/31/12, as adjusted at a. $2,355,000. b. $3,375,000. c. $4,020,000. d. $4,665,000. 97. Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared 160,000 Net income 500,000 Retained earnings, 1/1/12, as reported 2,000,000 Leonard should report retained earnings, 1/1/12, as adjusted at a. $1,785,000. b. $2,000,000. c. $2,215,000. d. $2,555,000. 98. Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared 160,000 Net income 500,000 Retained earnings, 1/1/12, as reported 2,000,000 Leonard should report retained earnings, 12/31/12, at a. $1,785,000. b. $2,125,000. c. $2,340,000. d. $2,555,000. 99. The following information was extracted from the accounts of Essex Corporation at December 31, 2012: CR(DR) Total reported income since incorporation $3,400,000 Total cash dividends paid (1,600,000) Unrealized holding loss (240,000) Total stock dividends distributed (400,000) Prior period adjustment, recorded January 1, 2012 150,000 What should be the balance of retained earnings at December 31, 2012? a. $1,310,000. b. $1,400,000. c. $1,160,000. d. $1,550,000. 100. Madsen Company reported the following information for 2012: Sales revenue $1,530,000 Cost of goods sold 1,050,000 Operating expenses 165,000 Unrealized holding gain on available-for-sale securities 120,000 Cash dividends received on the securities 6,000 For 2012, Madsen would report other comprehensive income of a. $411,000. b. $405,000. c. $126,000. d. $120,000. 101. Korte Company reported the following information for 2012: Sales revenue $1,500,000 Cost of goods sold 1,050,000 Operating expenses 165,000 Unrealized holding gain on available-for-sale securities 60,000 Cash dividends received on the securities 6,000 For 2012, Korte would report comprehensive income of a. $351,000. b. $345,000. c. $291,000. d. $60,000. 102. For the year ended December 31, 2012, Transformers Inc. reported the following: Net income $120,000 Preferred dividends declared 20,000 Common dividend declared 4,000 Unrealized holding loss, net of tax 2,000 Retained earnings 160,000 Common stock 80,000 Accumulated Other Comprehensive Income, Beginning Balance 10,000 What would Transformers report as its ending balance of Accumulated Other Comprehensive Income? a. $12,000 b. $10,000 c. $8,000 d. $2,000 103. For the year ended December 31, 2012, Transformers Inc. reported the following: Net income $120,000 Preferred dividends declared 20,000 Common dividend declared 4,000 Unrealized holding loss, net of tax 2,000 Retained earnings, beginning balance 160,000 Common stock 80,000 Accumulated Other Comprehensive Income, Beginning Balance 10,000 What would Transformers report as the ending balance of Retained Earnings? a. $278,000 b. $266,000 c. $256,000 d. $254,000 104. For the year ended December 31, 2012, Transformers Inc. reported the following: Net income $120,000 Preferred dividends declared 20,000 Common dividend declared 4,000 Unrealized holding loss, net of tax 2,000 Retained earnings, beginning balance 160,000 Common stock 80,000 Accumulated Other Comprehensive Income, Beginning Balance 10,000 What would Transformers report as total stockholders' equity? a. $344,000 b. $336,000 c. $256,000 d. $240,000 Multiple Choice Answers—Computational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 70. a 76. a 82. a 88. a 94. c 100. d 71. c 77. a 83. b 89. a 95. a 101 a 72. a 78. a 84. c 90. b 96. b 102 c 73. c 79. a 85. c 91. d 97. c 103 c 74. c 80. c 86. c 92. d 98. d 104 a 75. c 81. b 87. b 93. c 99. d Multiple Choice—CPA Adapted 105. Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012, included the following expense accounts: Accounting and legal fees $280,000 Advertising 240,000 Freight-out 150,000 Interest 120,000 Loss on sale of long-term investments 60,000 Officers' salaries 360,000 Rent for office space 360,000 Sales salaries and commissions 220,000 One-half of the rented premises is occupied by the sales department. How much of the expenses listed above should be included in Perry's selling expenses for 2012? a. $460,000. b. $610,000. c. $640,000. d. $790,000. 106. Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012, included the following expense accounts: Accounting and legal fees $280,000 Advertising 240,000 Freight-out 150,000 Interest 120,000 Loss on sale of long-term investments 60,000 Officers' salaries 360,000 Rent for office space 360,000 Sales salaries and commissions 220,000 One-half of the rented premises is occupied by the sales department. How much of the expenses listed above should be included in Perry's general and administrative expenses for 2012? a. $820,000. b. $880,000. c. $940,000. d. $1,000,000. 107. Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012 included the following expense and loss accounts: Accounting and legal fees $210,000 Advertising 270,000 Freight-out 120,000 Interest 105,000 Loss on sale of long-term investment 45,000 Officers' salaries 335,000 Rent for office space 330,000 Sales salaries and commissions 255,000 One-half of the rented premises is occupied by the sales department. Didde's total selling expenses for 2012 are a. $810,000. b. $690,000. c. $645,000. d. $555,000. 108. The following items were among those that were reported on Dye Co.'s income statement for the year ended December 31, 2012: Legal and audit fees $390,000 Rent for office space 540,000 Interest on inventory floor plan 630,000 Loss on abandoned equipment used in operations 105,000 The office space is used equally by Dye's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Dye's multiple-step income statement? a. $660,000. b. $765,000. c. $930,000. d. $1,290,000. 109. Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2012 included the following: Debit Credit Sales revenue $280,000 Cost of goods sold $100,000 Administrative expenses 50,000 Loss on disposal of equipment 18,000 Sales commission expense 16,000 Interest revenue 10,000 Freight-out 6,000 Loss due to earthquake damage 24,000 Bad debt expense 6,000 Totals $220,000 $290,000 Other information: Logan's income tax rate is 30%. Finished goods inventory: January 1, 2012 $160,000 December 31, 2012 140,000 On Logan's multiple-step income statement for 2012, Cost of goods manufactured is a. $126,000. b. $120,000. c. $86,000. d. $80,000. 110. Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2012 included the following: Debit Credit Sales revenue $280,000 Cost of good sold $100,000 Administrative expenses 50,000 Loss on disposal of equipment 18,000 Sales commission expense 16,000 Interest revenue 10,000 Freight-out 6,000 Loss due to earthquake damage 24,000 Bad debt expense 6,000 Totals $220,000 $290,000 Other information: Logan's income tax rate is 30%. Finished goods inventory: January 1, 2012 $160,000 December 31, 2012 140,000 On Logan's multiple-step income statement for 2012, Income before extraordinary item is a. $128,000. b. $94,000. c. $65,800. d. $49,000. 111. Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2012 included the following: Debit Credit Sales $280,000 Cost of sales $100,000 Administrative expenses 50,000 Loss on sale of equipment 18,000 Commissions to salespersons 16,000 Interest revenue 10,000 Freight-out 6,000 Loss due to earthquake damage 24,000 Bad debt expense 6,000 Totals $220,000 $290,000 Other information: Logan's income tax rate is 30%. Finished goods inventory: January 1, 2012 $160,000 December 31, 2012 140,000 On Logan's multiple-step income statement for 2012, Extraordinary loss is a. $16,800. b. $24,000. c. $29,400. d. $42,000. 112. Chase Corp. had the following infrequent transactions during 2012: A $225,000 gain from selling the only investment Chase has ever owned. A $315,000 gain on the sale of equipment. A $105,000 loss on the write-down of inventories. In its 2012 income statement, what amount should Chase report as total infrequent net gains that are not considered extraordinary? a. $120,000. b. $210,000. c. $435,000. d. $540,000. 113. James, Inc. incurred the following infrequent losses during 2012: A $140,000 write-down of equipment leased to others. A $80,000 adjustment of accruals on long-term contracts. A $120,000 write-off of obsolete inventory. In its 2012 income statement, what amount should James report as total infrequent losses that are not considered extraordinary? a. $340,000. b. $260,000. c. $220,000. d. $200,000. 114. Which of the following should be reported as a prior period adjustment? Change in Estimated Lives Change from Unaccepted of Depreciable Assets Principle to Accepted Principle a. Yes Yes b. No Yes c. Yes No d. No No Multiple Choice Answers—CPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 105. d 107. a 109. d 111. a 113. a 106. a 108. a 110. c 112. b 114. b DERIVATIONS — Computational No. Answer Derivation 70. a $180,000 $6,000 $30,000 – $16,500 = $199,500. 71 c $90,000 $15,000 $30,000 $12,000 $18,000 $19,500 = $184,500. 72. a 73. c $200,000 – $120,000 = $80,000. 74. c $450,000 – $270,000 = $180,000. 75. c $12,720,000 – $370,000 – $175,000 = $12,175,000. 76.