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Chapter 4: Q4-5CA (page 191)

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.

Short Answer

Expert verified

According to the data provided in the question, the single-step income statement鈥檚 format is not accurate for presenting the accounting data available.

Step by step solution

01

Meaning of GAAP

The term GAAP refers to the Generally Accepted Accounting Principles issued by the Financial Accounting Standards Board (FASB). GAAP contains general rules, guidelines, and principles that help maintain the accounting informationof a business concern.

02

Weaknesses in classification

In the single-step income statement, the business entity does not require to disclose the other items such as loss on discontinued, loss on sale of the warehouse, and so on.

The single-step income statement contains the description of revenues and expenses to reflect the net income and associated earnings per share.

03

Accurate presentation in accordance with GAAP

The accurate presentation in accordance with GAAP is as follows:

  • According to the given accounting data, the company requires to use the format of an income statement rather than adopting a single-step income statement.
  • Further, the loss on the sale of marketable securities should be disclosed in the continuing operation section of the income statement.
  • Also, the loss on the sale of the warehouse should be reported as an extraordinary item section of the income statement because the same is a non-recurring event of the business.
  • In addition, the number of outstanding common stocks is required to review the earnings per share computations鈥� accuracy.

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Most popular questions from this chapter

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鈥檛 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鈥檚 observation of materiality?
  4. What are the earnings per share implications of these topics?

(Multiple-Step Statement with Retained Earnings Statement) Presented below is information related to Ivan Calderon Corp. for the year 2017.

Net sales $1,300,000 Write-off of inventory due to obsolescence 80,000

Cost of goods sold 780,000 Depreciation expense omitted by accident in 2016 55,000

Selling expenses 65,000 Casualty loss 50,000

Administrative expenses 48,000 Cash dividends declared 45,000

Dividend revenue 20,000 Retained earnings at December 31, 2016 980,000

Interest Revenue 7,000

Effective tax rate of 34% on all items

Instructions

  1. Prepare a multiple-step income statement for 2017. Assume that 60,000 shares of common stock are outstanding for the entire year.
  2. Prepare a separate retained earnings statement for 2017.

What is earnings management?

Question: Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the company鈥檚 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?

Discuss the appropriate treatment in the income statement for the following items:

(a) Loss on discontinued operations.

(b) Non-controlling interest allocation.
See all solutions

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