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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

(Multiple-Step Statement, Retained Earnings Statement) The following information is related to Dickinson Company for 2017.

Retained earnings balance, January 1, 2017 \(980,000

Sales revenue 25,000,000

Cost of goods sold 16,000,000

Interest revenue 70,000

Selling and administrative expenses 4,700,000

Write-off of goodwill 820,000

Income taxes for 2017 1,244,000

Gain on the sale of investments 110,000

Loss due to flood damage 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) 90,000XXX

Dividends declared on common stock \)250,000

Dividends declared on preferred stock 80,000

Dickinson Company decided to discontinue its entire wholesale operations (considered a discontinued operation) and to retain its manufacturing operations. On September 15, Dickinson sold the wholesale operations to Rogers Company. During 2017, there were 500,000 shares of common stock outstanding all year.

Instructions

Prepare a multiple-step income statement and a retained earnings statement.

C.Reither Co. reports the following information for 2017: sales revenue \(700,000, cost of goods sold \)500,000, operating expenses \(80,000, and an unrealized holding loss on available-for-sale securities for 2017 of \)60,000. It declared and paid a cash dividend of \(10,000 in 2017. C Reither Co. has January 1, 2017, balances in common stock \)350,000; accumulated other comprehensive income \(80,000; and retained earnings \)90,000. It issued no stock during 2017.

Instructions

Prepare a statement of stockholders鈥� equity.

Starr Co. had sales revenue of \(540,000 in 2017. Other items recorded during the year were:

Cost of goods sold \)330,000

Salaries and wages expense 120,000

Income tax expense 25,000

Increase in value of company reputation 15,000

Other operating expenses 10,000

Unrealized gain on value of patents 20,000

Prepare a single-step income statement for Starr for 2017. Starr has 100,000 shares of stock outstanding.

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.

Maher Inc. reported income from continuing operations before taxes during 2017 of \(790,000. Additional transactions occurring in 2017 but not considered in the \)790,000 are as follows.

  1. The corporation experienced an uninsured flood loss in the amount of \(90,000 during the year.
  2. 2. At the beginning of 2015, the corporation purchased a machine for \)54,000 (salvage value of \(9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, but failed to deduct the salvage value in computing the depreciation base.
  3. Sale of securities held as a part of its portfolio resulted in a loss of \)57,000 (pretax).
  4. When its president died, the corporation realized \(150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of \)46,000 (the gain is nontaxable).
  5. The corporation disposed of its recreational division at a loss of \(115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations.
  6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2015 income by \)60,000 and decrease 2016 income by $20,000 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40%.

Instructions

Prepare an income statement for the year 2017 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)
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