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Chapter 4: 14E (page 185)

Tim Mattke Company began operations in 2015 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2017, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.

Year Weighted Average FIFO

2015 \(370,000 \)395,000

2016 390,000 \(430,000

2017 410,000 \)450,000

Instructions

  1. What is Mattke鈥檚 net income in 2017? Assume a 35% tax rate in all years.
  2. Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing.

Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2017 income statement.

Short Answer

Expert verified
  1. Net Income = $292,500
  2. Cumulative Effect= $68,250
  3. Net Effect = $256,750

Step by step solution

01

Meaning of Pretax Earnings

The calculation of a company's financial statement provides pretax income by deducting all operating expenses and non-operating expenses, excluding interest and taxes, from the revenue generated by the business. It is also known as income before tax.

02

Calculation of Mattke’s Net Income in 2017

Particulars

Amount ($)

Pretax Income in 2017

450,000

Income Tax (450,000X35%)

157,500

Net income

292,500

03

Computation of cumulative effect of change in the accounting principle

Year

Weighted Average Income

FIFO Income

Difference

Cumulative Difference

2015

$370,000

$395,000

$25,000

$25,000

2016

$390,000

$430,000

$40,000

$65,000

2017

$410,000

$450,000

$40,000

$105,000

Income tax @35%

$36,750

Net effects

$68,250

04

Preparing Comparative Income Statement for the year 2017

Particulars

2017

2016

2015

Income before Income tax

$450,000

$430,000

$395,000

Income tax @35%

$157,500

$150,500

$138,250

Net Income

$292,500

$279,500

$256,750

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Most popular questions from this chapter

Which of the following statements is correct regarding income reporting under IFRS?

(a) IFRS does not permit revaluation of property, plant, equipment, and intangible assets.

(b) IFRS provides the same options for reporting comprehensive income as GAAP.

(c) Companies must classify expenses by nature.

(d) IFRS provides a definition for all items presented in the income statement.

(Multiple-Step and Single-Step Statements) The accountant of Latifa Shoe Co. has piled the following information from the company鈥檚 records as a basis for an income statement for the year ended December 31, 2017.

Rent revenue \(29,000

Interest expense 18,000

Market appreciation on land above cost 31,000

Salaries and wages expense (selling) 114,800

Supplies (selling) 17,600

Income tax 37,400

Salaries and wages expense (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

Cash dividends declared 16,000

There were 20,000 shares of common stock outstanding during the year.

Instructions

  1. Prepare a multiple-step income statement.
  2. Prepare a single-step income statement.
  3. (c) Which format do you prefer? Discuss.

Which of the following is not reported in an income statement under IFRS?

(a) Discontinued operations.

(b) Extraordinary items.

(c) Cost of goods sold.

(d) Income tax.

(Single-Step Statement, Retained Earnings Statement, Periodic Inventory) Presented below is the trial balance of Thompson Corporation on December 31, 2017.

THOMPSON CORPORATION
TRIAL BALANCE

DECEMBER 31, 2017

Debit (\()

Credit (\))

Purchase Discounts

\(10,000

Cash

\)189,700

Accounts receivables

105,000

Rent Revenue

18,000

Retained Earnings

160,000

Salaries and Wages payable

18,000

Sales Revenue

1,100,000

Notes Receivables

110,000

Accounts payable

49,000

Accumulated Depreciation

28,000

Sales discount

14,500

Sales return and allowances

17,500

Notes payable

70,000

Selling expenses

232,000

Administrative expenses

99,000

Common Stock

300,000

Income tax expenses

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

19,600

Inventory

89,000

Buildings

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 \(64,000; thus, cost of goods sold for 2017 is \)645,000.

Instructions

Prepare a single-step 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. Thirty thousand shares of common stock were outstanding the entire year.

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
See all solutions

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