E4-6 (Multiple-step and Single-step) The accountant of Whitney Houston Shoe Co has compiled the



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E4-6 (Multiple-step and Single-step) The accountant of Whitney Houston Shoe Co. has compiled the
following information from the company's records as a basis for an income statement for the year ended
December 31, 2007.
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 expenses51,700
Cost of goods sold 496,000
Net sales 980,000
Depreciation on plant assets (70% selling, 30% administrative) 65,000
Cash dividends declared 16,000
There were 20,000 shares of common stock outstanding during the year.
Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.
(c) Which format do you prefer? Discuss.

(a) Multiple-Step Form

Whitney Houston Shoe Co.

Income Statement

For the Year Ended December 31, 2007

Net sales







$980,000

Cost of goods sold







496,000

Gross profit on sales







484,000













Operating Expenses










Selling expenses










Wages and salaries

$114,800







Depr. exp. (70% X $65,000)

45,500







Materials and supplies

17,600

$177,900




Administrative expenses










Wages and salaries

135,900







Other admin. expenses

51,700







Depr. exp. (30% X $65,000)

19,500

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













Earnings per share ($72,600 ÷ 20,000)







$3.63

(b) Single-Step Form

Whitney Houston Shoe Co.

Income Statement

For the Year Ended December 31, 2007

Revenues










Net sales







$ 980,000

Rental revenue







29,000

Total revenues







1,009,000













Expenses










Cost of goods sold







496,000

Selling expenses







177,900

Administrative expenses







207,100

Interest expense







18,000

Total expenses







899,000













Income before income tax







110,000

Income tax







37,400

Net income







$ 72,600













Earnings per share ($72,600 ÷ 20,000)







$3.63


Note: An alternative income statement format for the single-step form is to show income tax as part of expense, and not as a separate item.


(c)

Single-step:




1. Simplicity and conciseness.




2. Probably better understood by users.




3. Emphasis on total costs and expenses and net income.




4. Does not imply priority of one revenue or expense over another.




Multiple-step:




1. Provides more information through segregation of operating and nonoperating items.




2. Expenses are matched with related revenue.

E4-16 (Various Reporting Formats) The following information was taken from the records of Roland Carlson Inc. for the year 2007. Income tax applicable to income from continuing operations $187,000; income tax applicable to loss on discontinued operations $25,500; income tax applicable to extraordinary gain $32,300; income tax applicable to extraordinary loss $20,400; and unrealized holding gain on available-for-sale securities $15,000.



Extraordinary gain $ 95,000 Cash dividends declared $ 150,000
Loss on discontinued operations75,000 Retained earnings January 1, 2007 600,000
Administrative expenses 240,000 Cost of goods sold850,000
Rent revenue40,000 Selling expenses 300,000
Extraordinary loss60,000 Sales 1,900,000
Shares outstanding during 2007 were 100,000.
Instructions
(a) Prepare a single-step income statement for 2007.
(b) Prepare a retained earnings statement for 2007.
(c) Show how comprehensive income is reported using the second income statement format.


(a) Roland Carlson Inc.

Income Statement

For the Year Ended December 31, 2007

Revenues







Sales




$1,900,000

Rent revenue




40,000

Total revenues




1,940,000










Expenses







Cost of goods sold




850,000

Selling expenses




300,000

Administrative expenses




240,000

Total expenses




$1,390,000



Income from continuing operations before
income tax






550,000


Income tax




187,000

Income from continuing operations




363,000

Discontinued operations







Loss on discontinued operations

$75,000




Less: Applicable income tax reduction

25,500

49,500

Income before extraordinary items




313,500

Extraordinary items:







Extraordinary gain

95,000




Less: Applicable income tax

32,300

62,700







376,200

Extraordinary loss

60,000




Less: Applicable income tax reduction

20,400

39,600

Net income




$ 336,600




Per share of common stock:







Income from continuing operations ($363,000 ÷ 100,000)




$3.63

Loss on discontinued operations, net of tax




(.49)

Income before extraordinary items ($313,500 ÷ 100,000)




3.14

Extraordinary gain, net of tax




.63

Extraordinary loss, net of tax




(.40)

Net income ($336,600 ÷ 100,000)




$3.37




(b) Roland Carlson Inc.

Retained Earnings Statement

For the Year Ended December 31, 2007

Retained earnings, January 1




$600,000

Add: Net income




336,600







$936,600

Less: Dividends declared




150,000

Retained earnings, December 31




$786,600



(c) Roland Carlson Inc.

Comprehensive Income Statement

For the Year Ended December 31, 2007

Net income




$336,600

Other comprehensive income







Unrealized holding gain




15,000

Comprehensive income




$351,600

E18-4 (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a construction job with a contract price of $1,500,000. The job was completed in 2009. The following information is available.


2007 2008 2009
Costs incurred to date $400,000 $935,000 $1,070,000
Estimated costs to complete 600,000 165,000–0–
Billings to date300,000 900,000 1,500,000
Collections to date 270,000 810,000 1,425,000
Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of completion method is used.
(b) Prepare all necessary journal entries for 2008.
(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.
(a) Gross profit recognized in:





2007

2008

2009

Contract price




$1,500,000




$1,500,000




$1,500,000

Costs:



















Costs to date

$400,000




$935,000




$1,070,000




Estimated costs to complete



600,000



1,000,000



165,000



1,100,000



0



1,070,000

Total estimated profit





500,000





400,000





430,000

Percentage completed to date





40%*





85%**





100%

Total gross profit recognized





200,000





340,000





430,000

Less: Gross profit recognized in previous years






0






200,000






340,000

Gross profit recognized in current year






$ 200,000






$ 140,000






$ 90,000


**$400,000 ÷ $1,000,000

**$935,000 ÷ $1,100,000
(b) Construction in Process 535,000

($935,000 – $400,000)

Materials, Cash, Payables, etc. 535,000
Accounts Receivable ($900,000 – $300,000) 600,000

Billings on Construction in Process 600,000
Cash ($810,000 – $270,000) 540,000

Accounts Receivable 540,000
Construction Expenses 535,000

Construction in Process 140,000

Revenue from Long-Term Contracts 675,000*
*$1,500,000 X (85% – 40%)


(c) Gross profit recognized in:




2007

2008

2009

Gross profit

$ –0–

$ –0–

$430,000*


*$1,500,000 – $1,070,000

E18-5 (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction


Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Beth
Botsford uses the percentage-of-completion method for financial accounting purposes. The income to berecognized each year is based on the proportion of cost incurred to total estimated costs for completingthe contract. The financial statement presentations relating to this contract at December 31, 2007, follow.
Balance Sheet

Accounts receivable—construction contract billings $21,500


Construction in progress $65,000
Less: Contract billings 61,500
Cost of uncompleted contract in excess of billings 3,500
Income Statement
Income (before tax) on the contract recognized in 2007 $18,200

Instructions


(a) How much cash was collected in 2007 on this contract?
(b) What was the initial estimated total income before tax on this contract?

(a) Contract billings to date $61,500

Less: Accounts receivable 12/31/07 21,500

Portion of contract billings collected $40,000


(b)

$18,200

= 28%

$65,000


(The ratio of gross profit to revenue recognized in 2007.)
$1,000,000 X .28 = $280,000
(The initial estimated total gross profit before tax on the contract.)

P18-7 (Long-Term Contract with an Overall Loss) On July 1, 2007, Kyung-wook Construction Company Inc. contracted to build an office building for Mingxia Corp. for a total contract price of $1,950,000. On July 1, Kyung-wook estimated that it would take between 2 and 3 years to complete the building. On December 31, 2009, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Mingxia for 2007, 2008, and 2009.


AtAt At
12/31/07 12/31/0812/31/09
Contract costs incurred to date$ 150,000 $1,200,000 $2,100,000
Estimated costs to complete the contract1,350,000800,000 –0–
Billings to Mingxia300,0001,100,0001,850,000

Instructions


(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2007, 2008, and 2009. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be
recognized as a result of this contract for the years ended December 2007, 2008, and 2009. (Ignore income taxes.)
(a) Computation of Recognizable Profit/Loss

Percentage-of-Completion Method
2007
Costs to date (12/31/07) $ 150,000

Estimated costs to complete 1,350,000

Estimated total costs $1,500,000
Percent complete ($150,000 ÷ $1,500,000) 10%
Revenue recognized ($1,950,000 X 10%) $ 195,000

Costs incurred 150,000

Profit recognized in 2007 $ 45,000
2008
Costs to date (12/31/08) $1,200,000

Estimated costs to complete 800,000

Estimated total costs 2,000,000

Contract price 1,950,000

Total loss $ 50,000
Total loss $ 50,000

Plus gross profit recognized in 2007 45,000

Loss recognized in 2008 $ (95,000)
OR
Percent complete ($1,200,000 ÷ $2,000,000) 60%
Revenue recognized in 2008

[($1,950,000 X 60%) – $195,000] $ 975,000

Costs incurred in 2008

($1,200,000 – $150,000) 1,050,000

Loss to date 75,000

Loss attributable to 2009* 20,000

Loss recognized in 2008 $ (95,000)
*2009 revenue

($1,950,000 – $195,000 – $975,000) $780,000

2009 estimated costs 800,000

2009 loss $ (20,000 )
2009
Costs to date (12/31/09) $2,100,000

Estimated costs to complete 0

2,100,000

Contract price 1,950,000

Total loss $ (150,000)
Total loss $ (150,000)

Less: Loss recognized in 2008 $95,000

Gross profit recognized in 2007 (45,000 ) (50,000)

Loss recognized in 2009 $ (100,000)
(b) Computation of Recognizable Profit/Loss

Completed-Contract Method
2007—NONE
2008
Costs to date (12/31/08) $1,200,000

Estimated costs to complete 800,000

Estimated total costs 2,000,000

Deduct contract price 1,950,000

Loss recognized in 2008 $ (50,000)
2009
Total costs incurred $2,100,000

Total revenue recognized 1,950,000

Total loss on contract (150,000)

Deduct loss recognized in 2008 (50,000)

Loss recognized in 2009 $ (100,000)


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