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 £64,000

of goods sold for 2010 is £645,000

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) £1,068,000
Cost of goods sold 645,000
Gross profit 423,000
Selling Expenses £232,000
Administrative Expenses 99,000 331,000
92,000
Other income and expense
Gain on sale of land 30,000
Rent revenues 18,000 48,000
Income before income taxes 140,000
Income Tax Expense 53,900
Net income £86,100

Earnings per share (£86.100 ÷ 30.000 shares) £2.87

Computation of cost of goods sold: Can be verified as follows:

Merchandise inventory, Jan. 1 £89,000
Purchases £610,000
Less: Purchase discounts 10,000
Net purchases 600,000
Add: Freight-in 20,000 620,000
Merchandise available for sale 709,000
Less: merchandise inventory, Dec. 31 64,000
Cost of goods sold £645,000

THOMPSON CORPORATION
Statement of Retained Earnings
Year Ended December 31, 2010

Retained earnings January 1, £160,000

Add: Net income 86,100
246,100
Less: Cash dividends declared and paid 45,000
Retained earnings, December 31, £201,100

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

Name: Solution
Exercise: E4-12, Retained Earnings Statement (20-25 minutes)
Course:
Date:
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 Net income Dividends declared

2007 $40,000 $0
2008 125,000 50,000
2009 160,000 50,000

The following information relates to 2010:

Income before income taxes $220,000
Prior period adjustment: Understatement of 2008 depreciation expense. (Before taxes) $25,000
Cumulative decrease in income from change in inventory methods (before taxes) $45,000
Dividends declared $100,000
Of the dividends declared to date, the amount that will be paid on Jan 15, 2011 is: $25,000
Effective tax rate 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) $225,000
Correction for depreciation error (net of $25.000, - 20% tax rate or $5.000 tax) (20,000)
Cumulative decrease in income from change in inventory methods
(net of $45.000 - 20% tax or $9.000 tax) (36,000)
Balance, January 1, as adjusted 169,000
Add: Net income [$220.000 - ($220.000 × 20%)] 176,000
345,000
Deduct dividends declared 100,000
Balance, December 31 $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 $70,000
Unappropriated 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: Solution
Problem: P4-4, Income Statement Items
Course:
Date:
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.
2. At the beginning of 2008, the corporation purchased a machine for $54,000 residual value of
$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.
3. Sale of securities held as part of its portfolio resulted in a gain of $47,000
4. The corporation disposed of its recreational division at a loss of $115,000 before taxes.
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 $748,500
Income tax ($748.500 × 0,30) 224,550
Income from continuing operations: 523,950
Discontinued operations:
Loss from disposal of recreational division $115,000
Less: Applicable income tax reduction 34,500 80,500
Net income $443,450

Earnings per share

Income from operations $4.37
Discontinued operations, net of tax ($0.67)
Net income per share ($443.450 ÷ 120.000 shares) $3.70

Computation of income tax:

As previously stated $790,000
Uninsured flood loss (90,000)
Gain on sale of securities 47,000
Error in computation of depreciation
As computed ($54.000÷ 6 years) $9,000
Corrected (($54.000 – $9.000) ÷ 6 years) (7,500) 1,500
As restated $748,500

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

Name: Solution
Exercise: E5-7, Current Assets Section of the Statement of Financial Position
Course:
Date:
Presented below are selected accounts of Aramis Company at December 31, 2010.

Finished Goods € 52,000 Cost of Goods Sold € 2,100,000

Revenue Received in Advance 90,000 Notes Receivable 40,000
Equipment 253,000 Accounts Receivable 161,000
Work-in-Process 34,000 Raw Materials 187,000
Cash 42,000 Supplies Expense 60,000
Trading Securities 31,000 Allowance for Doubtful Accounts 12,000
Customer Advances 36,000 Licenses 18,000
Cash Restricted for Plant Expansion 50,000 Share Premium - Ordinary 88,000
Treasury Stock 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 € 50,600
3. The trading securities have a fair value of € 29,000
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 € 50,000
are pledged as collateral on a bank loan.
6. Licenses are recorded net of accumulated amortization of € 14,000
7. Treasury shares are recorded at cost.

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 € 52,000
Work-in-process 34,000
Raw materials 187,000 € 273,000
Accounts receivable (of which €50.000 is pledged as collateral on
a bank loan) 161,000
Less allowance for doubtful accounts (12,000) 149,000
Interest receivable [(€40.000 × 6,00%) × 8/12] 1,600
Trading securities at fair value (cost, €31.000) 29,000
Cash € 92,000
Less: Cash restricted for plant expansion (50,000) € 42,000
Total current assets € 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