Preparation of Income Statement

Problem 1: (Multiple step and Single step)

Two accountants for the firm of Elwes and Wright are arguing about the merits of presenting an income
statement in a multiple step versus a single step format. The discussion involves the following 2004
information related to P. Bride Company (000 omitted)
Administrative expenses
Officer’s salaries $ 4,900
Depreciation of office furniture and equipment 3,960
Cost of goods sold 60,570
Rental revenue 17,230
Selling expense
Transportation-out 2,690
Sales commissions 7,980
Depreciation of sales equipment 6,480
Sales 96,500
Income tax 9,070
Interest expense 1,860
Instructions:
a. Prepare an income statement for the year 2004 using the multiple step form. Common shares
outstanding for 2004 total 40,550 (000 omitted).
b. Prepare an income statement for the year 2004 using the single step form.
c. Which one do you prefer? Discuss.

Answer:
(a)
Multiple-Step Form
P. Bridge Company
Income Statement
For the Year Ended December 31, 2004
(In thousands, except earnings per share)
Sales $96,500
Cost of goods sold 60,570
Gross profit 35,930
Operating Expenses
Selling expenses
Sales commissions 7,980
Depr. of sales equipment 6,480
Transportation-out 2,690 17,150
Administrative expenses
Officer’s salaries 4,900
Depr. of office furn. and equip 3,960 8,860 26,010
Income from operations 9,920
Other Revenues and Gains
Rental revenue 27,150
Other Expenses and Losses
Interest expense 1,860
Income before taxes 25,290
Income taxes 9,070
Net income $16,220
Earnings per share ($16,220 + 40,550) $.40

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 1

(b)
Single Step Form
P. Bridge Company
Income Statement
For the Year Ended December 31,2004
(In thousands, except earnings per share)
Revenues
Net sales $96,500
Rental Revenue 17,230
Total revenues 113,730
Expenses
Cost of goods sold 60,570
Selling expenses 17,150
Administrative expenses 8,860
Interest expense 1,860
Total expenses 88,440

Income before taxes 25,290

Income taxes 9,070
Net Income $16,220

Earnings per share $.40

(c) Single step:

1. Simplicity and conciseness
2. Probably better understood by user.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of one expense over another.

Multiple-step:
1. Provides more information through segregation of operating and non-operating items.
2. Expenses are matched with related revenue.

Problem 2: (Multiple step and Extraordinary Items)

The following balances were taken from the books of Maria Conchita Alonza Corporation on December 31,
2004.
Interest revenue $ 86,000 Accumulated depreciation – equipment $ 40,000
Cash 51,000 Accumulated depreciation-building 28,000
Sales 1,380,000 Notes receivable 155,000
Accounts receivable 150,000 Selling expenses 194,000
Prepared insurance 20,000 Accounts payable 170,000
Sales returns allowances 150,000 Bonds Payable 100,000
Allowance for doubtful accounts 7,000 Administrative and general expenses 97,000
Sales discounts 45,000 Accrued liabilities 32,000
Land 100,000 Interest expense 60,000
Equipment 200,000 Notes payable 100,000
Building 140,000 Loss from earthquake damage 150,000
(extraordinary item)
Cost of goods sold 621,000 Common stock 500,000
Retained earnings 21,000
Assume the total effective tax rate on all items is 34%.
Instructions:
Prepare a multiple step income statement; 100,000 shares of common stock were outstanding during the year.

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 2

Answer:

Maria Conchita Alonzo Corp.

Income Statement
For the Year Ended December 31, 2004

Sales Revenue
Sales $1,380,000
Less: Sales returns and allowances $150,000
Sales discounts 45,000 195,0000
Net sales revenue 1,185,000
Cost of goods sold 621,000
Gross profit 564,000
Operating Expenses
Selling expenses 194,000
Admin and general expenses 97,000 291,000
Income from operations 273,000

Other Revenues and Gains

Interest revenue 86,000
359,000

Other Expenses and Losses

Interest expense 60,000

Income before taxes and extraordinary item 299,000

Income taxes ($299,000Í .34) 101,660
Income before extraordinary item 197,340
Extraordinary item
Loss from earthquake damage 150,000
Less applicable tax reduction ($150,000Í.34) 51,000 99,000
Net Income $98,340

Per share of common stock:

Income before extraordinary item ($197,340 ÷ 100,000) $1.97
Extraordinary item (net of tax) (.99)
Net income ($98,340 ÷ 100,000) $.98

Problem 3: (Multiple step and Single step)

The accountant of Whitney Houston Shoe Co. has complied the following information from the company’s
record as a basis for an income statement for the year ended December 31, 2004.
Rental revenue $ 29,000
Interest on notes payable 18,000
Market appreciation on land above cost 31,000
Wages and salaries – sales 114,800
Materials and supplies – sales 17,600
Income tax 37,400
Wages and salaries – administrative 135,900
Other administrative expenses 51,700
Cost of goods sold 496,000
Net sales 980,000
Depreciation on plant assets (70% selling, 30% administrative) 65,000
Dividends declared 16,000
There were 20,000 shares of common stock outstanding during the year.

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 3

Instructions:
a. Prepare a multiple step income statement
b. Prepare a single step income statement
c. Which format do you prefer? Discuss

Answer:

(a)
Multiple Stem Form
Whitney Houston Shoe Co.
Income Statement
For the Year Ended December 31,2004

Net Sales $980,000

Cost of Goods Sold 496,000
Gross profit 484,000

Operating Expenses
Selling expenses
Wages and salaries $114,800
Materials and supplies 17,600
Depr. Exp. (70% Í $65,000) 45,500 $177,900
Administrative expenses
Wages and salaries 135,900
Depr. exp., (30% Í $65,000) 19,500
Other admin. expenses 51,700 207,100 385,000
Income from operations 99,000

Other Revenues and Gains

Rental revenue 29,000
128,000
Other Expenses and Losses
Interest expense 18,000

Income before income tax 110,000

Income tax 37,400
Net income $72,600

Earning per share ($72,600 ÷ 20,000) $3.63

(c) Single-step:
1. Simplicity and conciseness.
2. Probably better understood by user.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of on expense over another.

Multiple step:
1. Provides more information through segregation of operating and nonoperating items.
2. Expenses are matched with related revenue.

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 4

Problem 4: (Multiple step statement with Retained Earnings)
Presented below is information related to Ivan Calderon Corp. for the year 2004.
Net Sales $1,300,000 Write off of inventory due to obsolescence $80,000
Cost of goods sold 780,000 Depreciation expense omitted by accident in 55,000
2003
Selling expenses 65,000 Casualty loss (extraordinary item) before taxes 50,000
Administrative expenses 48,000 Dividends declared 45,000
Dividend revenue 20,000 Retained earnings at December 31,2003 980,000
Interest revenue 7,000
Effective tax rate of 34% on all items
Instructions:
a. Prepare a multiple step income statement for 2004. Assume that 60,000 shares of common stock are
outstanding.
b. Prepare a separate retained earnings statement for 2004.

Answer:

(a)
Ivan Calderon Corp
Income Statement
For the Year Ended December 31,2004
Sales Revenue
Net sales $1,300,000
Cost of goods sold 780,000
Gross Profit 520,000

Operating Expenses
Selling expenses $65,000
Administrative expenses 48,000 113,000
Income from operations 434,000

Other Revenues and Gains

Dividend revenue 20,000
Interest revenue 7,000 27,000
434,000
Other Expenses and Losses
Write off of inventory due to obsolescence 80,000
Income before taxes and extraordinary item 354,000
Income taxes 120,360
Income before extraordinary item 233,640
Extraordinary item
Casualty loss 50,000
Less applicable tax reduction 17,000 33,000
Net income $200,640

Per share of common stock:

Income before extraordinary item ($233,640 ÷ 60,000) $3.89
Extraordinary item (net of tax) (.55)
Net income ($200,640 ÷ 60,000) $3.34

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 5

(b)
Ivan Calderon Corp.
Retained Earnings Statement
For the Year Ended December 31, 2004
Balance, Jan 1, as reported $980,000
Correction for overstatement of net income in prior period
(depreciation error) (net of $18,700 tax) (36,300)
Balance, Jan 1, as adjusted 943,700
Add: Net income 200,640
1,144,340
Less: Dividends declared 45,000
Balance, Dec. 31 $1,099,340

Problem 5: (Condensed Income Statement – Periodic Inventory Method)

Presented below are selected ledger accounts of Spock Corporation at December 31, 2004.
Cash $ 185,000 Travel and entertainment $ 69,000
Merchandise inventory 535,000 Accounting and legal services 33,000
Sales 4,275,000 Insurance expense 24,000
Advances from Customers 117,000 Advertising 54,000
Purchases 2,786,000 Transportation-out 93,000
Sales discounts 34,000 Depreciation of office equipment 48,000
Purchase discounts 27,000 Depreciation of sales equipment 36,000
Sales salaries 284,000 Telephone sales 17,000
Office salaries 346,000 Utilities-office 32,000
Purchase returns 15,000 Miscellaneous office expenses 8,000
Sales returns 79,000 Rental revenue 240,000
Transportation-in 72,000 Extraordinary loss (before tax) 70,000
Accounts receivable 142,500 Interest expenses 176,000
Sales commissions 83,000 Common stock ($10 par) 900,000
Spock’s effective tax rate on all items is 34%. A physical inventory indicates that the ending inventory is
$686,000.
Instructions:
Prepare a condensed 2004 income statement for Spock Corporation.

Answer:
Spock Corporation
Income Statement
For the Year Ended December 31,2004
Net sales $4,162,000
Cost of goods sold 2,665,000
Gross profit 1,497,000
Selling expenses $636,000
Administrative expenses 491,000 1,127,000
Income from operations 370,000
Other revenue 240,000
Other expense (176,000) 64,000
Income before taxes 434,000
Income taxes ($434,0000Í.34) 147,560
Income before extraordinary item 286,440
Extraordinary loss, net of $23,800 taxes 46,200
Net income $240,240
Earnings per share ($900,000 ÷ $10 per value = 90,000 shares)
Income before extraordinary item ($286,440 ÷ 90,000) $3.18
Extraordinary item (.51)
Net Income $2.67

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 6

Supporting Computations
Net sales:
$4,275,000 - $34,000 - $79,000 = $4,162,000
Cost of goods sold:
$535,000 + ($2,786,000+$72,000 - $27,000 - $15,000) - $686,000 = $2,665,000
Selling expenses:
$284,000+$83,000+$69,000+$54,000+$93,000+$36,000+$17,000 = $636,000
Administrative expenses:
$346,000+$33,000+$24,000+$48,000+$32,000+$8,000 = $491,000

Problem 6: (Retained Earnings Statement)

Eddie Zambrano Corporation began operations on January 1, 2001. During its first 3 years of operations,
Zambrano reported net income and declared dividends as follows.
Net Income Dividends declared
2001 $ 40,000 $ -0-
2002 125,000 50,000
2003 160,000 50,000
The following information relates to 2004
Income before income tax $240,000
Prior period adjustment: understatement of 2002 depreciation expense (before taxes) $25,000
Cumulative decrease in income from change in inventory methods (before taxes) $35,000
Dividends declared (of this amount, $25,000 will be paid on Jan, 15, 2005) $100,000
Effective tax rate 40%
Instruction:
a. Prepare a 2004 retained earnings statement for Eddie Zambrano Corporation.
b. Assume Eddie Zambrano Corporation restricted retained earnings in the amount of $70,000 on
December 31, 2004. After this action, what would Zambrano report as total retained earnings in its
December 31, 2004, balance sheet?

Answer:
(a)
Eddie Zambrano Corporation
Retained Earnings Statement
For the Year Ended December 31,2004
Balance, January 1, as reported $225,000
Correction for depreciation error (net of $10,000 tax) 15,000
Balance, January 1, as adjusted 210,000
Add net Income 123,000
333,000
Deduct dividends declared 100,000
Balance, December 31 $233,000

* ($40,000 ÷ $125,000 ÷ $160,000) – ($50,000 ÷ $50,000)

**[$240,000-(40%Í$240,000)] – [$35,000-(40%Í$35,000)]

(b) Total retained earnings would still be reported as $233,000. 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 163,000
Total $233,000

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 7

Problem 7: Multi step Income, Retained Earnings)
Presented below is information related to American Horse Company for 2004.
Retained earnings balance, January $ 980,000
Sales for the year 25,000,000
Cost of goods sold 17,000,000
Interest revenue 70,000
Selling and administrative expenses 4,700,000
Write off of goodwill (not tax deductible) 820,000
Income taxes for 2004 905,000
Gain on the sale of investments (normal recurring) 110,000
Loss due to flood damage-extraordinary item (net of tax) 390,000
Loss on the disposition of the wholesale division (net of tax) 440,000
Loss on operations of the wholesale division (net of tax) 90,000
Dividends declared on common stock 250,000
Dividends declared on preferred stock 70,000

Instructions
Prepare a multiple step income statement and a retained earnings statement. Americans Horse Company
decided to discontinue its entire wholesale operations and to retain its manufacturing operations. On
September 15, American Horse sold the wholesale operations to Rogers Company. During 2004, there were
300,000 shares of common stock outstanding all year.

Answer:

American Horse Company

Income Statement
For the Year Ended December 31,2004

Sales $25,000,000
Less cost of goods sold 17,000,000
Gross profit 8,000,000
Less selling and administrative expenses 4,700,000
Income from operations 3,300,000
Other revenues and gains
Interest revenue $70,000
Gain on the sale of investments 110,000 180,000
Other expenses and losses
Write-off of goodwill 820,000
Income from continuing operations before
income taxes 2,660,000
income taxes 905,000
Income from continuing operations 1,755,000
Discontinued operations
Loss on operations, net of tax 90,000
Loss on disposal, net of tax 440,000 530,000
Income before extraordinary item 1,225,000
Extraordinary loss from flood damage, net of
tax 390,000
Net income $ 835,000

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 8

Problem 8: Multiple- and Single-step Income, Retained Earnings)
The following account balances were included in the trial balance of J.R Reid Corporation at June
30,2004
Sales $1,678,500 Depreciation of Office furniture and $ 7,250
equipment
Sales discounts 31,150 Real estate and other local taxes 7,320
Cost of goods sold 896,770 Bad debt expense-selling 4,850
Sales salaries 56,260 Building expense – prorated to 9,130
administration
Sales commissions 97,600 Miscellaneous office expanses 6,000
Travel expense – salespersons 28,930 Sales return 62,300
Freight-out 21,400 Dividends received 38,000
Entertainment expense 14,820 Bond interest expense 18,000
Telephone and Internet expense- 9,030 Income taxes 133,000
sales
Depreciation of sales equipment 4,980 Depreciation understatement due to 17,700
error- 2001 (net of tax)
Building expense-prorated to sales 6,200 Dividends declared on preferred stock 9,000
Miscellaneous selling expenses 4,715 Dividends declared on common stock 32,000
Office supplies used 3,450
Telephone and internet expense- 2,820
administration

The Retained Earnings account had a balance of 337,000 at June 2004, before closing. There are 80,000 shares
of common stock outstanding.

Instructions:
a. Using the multiple step form, prepare an income statement add a retained earnings statement for the
year ended June 30,2004
b. Using the single step form, prepare an income statement and a retained earnings statement for the year
ended June 30, 2004

Answer:

J.R. Reid Corporation

Income Statement
For the Year Ended June 30, 2004

Sales Revenue
Sales $1,678,500
Less : Sales discounts $31,150
Sales returns 62,300 93,450
Net sales 1,585,050
Cost of Goods Sold 869,770
Gross profit 688,280

Operating Expenses
Selling expenses $ 97,600
Sales commissions 56,260
Sales salaries 28,930
Travel expense 28,930
Entertainment expense 14,820
Freight-out 21,400
Telephone and internet exp. 9,030
Depr. of sales equipment 4,980
Building expense 6,200

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 9

 Bad debt expense 4,850
Misc. selling expense 4,715 248,785

Administrative Expenses
Real estate and other local taxes 7,320
Building expense 9,130
Depreciation of office
furniture and equipment 7,250
Office supplies used 3,450
Telephone and Internet expense 2,820
Miscellaneous office
expenses 6,000 35,970 284,755
Income from operations 403,525
Other Revenues and Gains
Dividend revenue 38,000
441,525
Other Expenses and Losses
Bond interest expense 18,000

423,525
Income before taxes 133,000
Income taxes $290,525

Earnings per common share

($290,525 - $9,000 of preferred dividends + 80,000 shares) $3.52

J.R Reid Corporation

Retained Earnings Statement
For the Year Ended June 30,2004

Retained earnings, July 1, 2003

as reported $337,000
Correction of depreciation
understatement (net of tax) 17,700
Adjusted balance of retained
earnings at July 1,2003 $ 319,300
Plus net income 290,525
609,825
Deduct:
Dividends declared on preferred stock 9,000
Dividends declared on common stock 32,000 41,000
Retained earnings, June 30, 2004 $568,825

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 10

(b)
J.R. Reid Corporation
Income Statement
For the Year Ended June 30, 2004
Revenue
Net sales $1,585,050
Dividend revenue 38,000
Total revenues 1,623,050

Expenses
Cost of goods sold 896,770
Selling expenses 248,785
Administrative expenses 35,970
Bond interest expense 18,000
Total expenses 1,199,525
Income before taxes 423,525
Income taxes 133,000
Net income $290,525
Earnings per common share $3.52

J.R Reid Corporation

Retained Earnings Statement
For the Year Ended June 30, 2004

Retained earnings, July 1,2003 as reported $337,000

Correction of depreciation understatement
(net of tax) 17,700
Retained earnings, July 1, 2003 adjusted $319,300
Plus net income 290,525
609,825
Deduct:
Dividends declared on preferred stock 9,000
Dividends declared on common stock 32,000 41,000
Retained earnings, June 30, 2004 $568,825

Md. Bazlur Rahman, Associate Professor, Department of Marketing, University of Chittagong 11