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Question 4P-A

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Intermediate Accounting (Kieso)
Found in: Page 187

Short Answer

The following account balances were included in the trial balance of Twain Corporation at June 30, 2017.

Sales revenue $1,578,500

Depreciation expense (office furniture and equipment) $7,250

Sales discounts $31,150

Cost of goods sold $896,770

Property tax expense $7,320

Salaries and wages expense (sales) $56,260

Bad debt expense (selling) $4,850

Sales commissions $97,600

Maintenance and repairs expense (administration) $9,130

Travel expense (salespersons) $28,930

Delivery expense $21,400

Office expense $6,000

Entertainment expense $14,820

Sales returns and allowances $62,300

Telephone and Internet expense (sales) $9,030

Dividends received $38,000

Depreciation expense (sales equipment) $4,980

Interest expense $18,000

Maintenance and repairs expense (sales) $6,200

Income tax expense $102,000

Miscellaneous selling expenses $4,715

Depreciation understatement due to error—2014 (net of tax) $17,700

Office supplies used $3,450

Telephone and Internet expense (administration) $2,820

Dividends declared on preferred stock $9,000

Dividends declared on common stock $37,000

The Retained Earnings account had a balance of $337,000 at July 1, 2016. There are 80,000 shares of common stock outstanding.

Instructions

(a) Using the multiple-step form, prepare an income statement and a retained earnings statement for the year ended June 30, 2017.

The net income of the company is $221,525.

The balance in the statement of retained earnings is $494,825.

See the step by step solution

Step by Step Solution

Meaning of Multi-Step Income Statement

A multi-step income statement follows a specific format to present the revenues and expenses of a business concern. It represents the operating and non-operating earnings and expenses separately.

Preparation of multi-step income statement

In the books of Twain Corporation

Multi-step Income Statement

For the year ended June 30, 2017

Particulars

Details

Amounts ($)

Sales revenue

1,578,500

Less: Sales discount

31,150

Less: Sales returns and allowances

62,300

(93,450)

Net sales

1,485,050

Less: Cost of goods sold

(896,770)

Gross profit

588,280

Operating expenses

Sales commissions

97,600

Salaries and wages

56,260

Travel expense

28,930

Delivery expense

21,400

Entertainment expense

14,820

Telephone and internet expense

9,030

Maintenance and repairs expense

6,200

Depreciation expense

4,980

Bad debt expense

4,850

Miscellaneous selling expense

4,715

(248,785)

Administrative expenses

Maintenance and repair expense

9,130

Property tax expense

7,320

Depreciation expense

7,250

Supplies expense

3,450

Telephone and internet expense

2,820

Miscellaneous office expenses

6,000

(35,970)

Operating income

303,525

Other gains and revenues

Dividend revenue

38,000

Other expenses and losses

Interest expense

(18,000)

Income before tax

323,525

Less: Income tax expense

(102,000)

Net income

$221,525

Earnings per share ($221,525-9000)/80000

$2.66

Preparation of retained earnings statement

In the books of Twain Corporation

Retained Earnings Statement

For the year ended June 30, 2017

Particulars

Amounts ($)

Balance as on July 1, 2016

337,000

Correction of depreciation understatement

(17,700)

Add: Net income

221,525

Less: Dividend declared on preferred stock

(9,000)

Less: Dividend declared on common stock

(37,000)

Balance as on June 30, 2017

$494,825

Most popular questions for Business-studies Textbooks

Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As an auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president.

Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.

Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations.

Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be subject to reporting outside operating income?

Controller: I am not sure whether this item should get special reporting or not.

Vice President: Oh well, it doesn’t make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.

Instructions

  1. On the basis of the foregoing discussion, answer the following questions. Who is correct about handling the sale? What would be the correct income statement presentation for the sale of the Casino Knights Division?
  2. How should the walkout by the employees be reported?
  3. What do you think about the vice president’s observation of materiality?
  4. What are the earnings per share implications of these topics?
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