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Intermediate Accounting (Kieso)
Found in: Page 192

Short Answer

Question: Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the company’s financial statements at year-end. Currently, he is focusing on the income statement and determining the format for reporting comprehensive income. During the year, the company earned net income of $400,000 and had unrealized gains on available-for-sale securities of $15,000. In the previous year, net income was $410,000, and the company had no unrealized gains or losses.

Instructions

(a) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the two statement format.

(b) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the one statement format.

(c) Which format should Nelson recommend?

The two statement format of reporting comprehensive income is recommended by Nelson.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Income Statement

An income statement is a report that contains the revenues and expenses of a business entity for a particular accounting period. Such a report ascertains the profits earned or losses incurred from operating and non-operating activities.

Step 2: Preparation of two statement format

Jenkins Corporation
Comparative Income Statement
For the year ended…………

Particulars

Current Year

Previous Year

Sales revenue

Less: Cost of goods sold

Gross profit

Less: Operating expense

Net income

$400,000

$410,000

Jenkins Corporation
Comparative Income Statement
For the year ended…………

Particulars

Current Year

Previous Year

Net income

$400,000

$410,000

Other comprehensive income

Unrealized holding gain

$15,000

$0

Comprehensive income

$415,000

$410,000

Step 3: Preparation of one statement format

Step 4: Recommended format

The two-statement format of reporting comprehensive income is recommended because it involves the preparation of two different statements and helps in understanding the identification of gains or losses associated with the comprehensive income.

Most popular questions for Business-studies Textbooks

The following financial statement was prepared by employees of Walters Corporation.

WALTERS CORPORATION

INCOME STATEMENT

THE YEAR ENDED DECEMBER 31, 2017

Revenues

Gross sales, including sales taxes $1,044,300

Less: Returns, allowances, and cash discounts 56,200

Net sales 988,100

Dividends, interest, and purchase discounts 30,250

Recoveries of accounts written off in prior years 13,850

Total revenues 1,032,200

Costs and expenses

Cost of goods sold, including sales taxes 465,900

Salaries and related payroll expenses 60,500

Rent 19,100

Delivery expense and freight in 3,400

Bad debt expense 27,800

Total costs and expenses 576,700

Income before other items 455,500

Other items

Loss on discontinued styles (Note 1) 71,500

Loss on sale of marketable securities (Note 2) 39,050

Loss on sale of warehouse (Note 3) 86,350

Total other items 196,900

Net income $258,600

Net income per share of common stock $2.30

Note 1: New styles and rapidly changing consumer preferences resulted in a $71,500 loss on the disposal of discontinued styles and related accessories.

Note 2: The Corporation sold an investment in marketable securities at a loss of $39,050. The corporation normally sells securities of this nature.

Note 3: The Corporation sold one of its warehouses at an $86,350 loss.

Instructions

Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You should explain why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.

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