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Chapter 4: Question 8BE (page 181)
In 2017, Hollis Corporation reported net income of \(1,000,000. It declared and paid preferred stock dividends of \)250,000. During 2017, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis鈥檚 2017 earnings per share.
Hollis's earnings per share are $3.95
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(Multiple-Step Statement) The following balances were taken from the books of Alonzo Corp. on December 31, 2017.
Interest revenue \(86,000 Accumulated depreciation equipment \)40,000
Cash \(51,000 Accumulated depreciation鈥攂uildings \)28,000
Sales revenue \(1,380,000 Notes receivable \)155,000
Accounts receivable \(150,000 Selling expenses \)194,000
Prepaid insurance \(20,000 Accounts payable \)170,000
Sales returns and allowances \(150,000 Bonds payable \)100,000
Allowance for doubtful accounts \(7,000 Administrative and general expense \)97,000
Sales discounts \(45,000 Accrued liabilities \)32,000
Land \(100,000 Interest expense \)60,000
Equipment \(200,000 Notes payable \)100,000
Buildings \(140,000 Loss from earthquake damage \)150,000
Cost of goods sold \(621,000 Common stock \)500,000
Retained earnings $21,000
Assume the total effective tax rate on all items is 34%.
Instructions
Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year.
Identify at least two situations in which important changes in value are not reported in the income statement.
Discuss the appropriate treatment in the financial statements of each of the following.
(a) Gain on sale of investment securities.
(b) A profit-sharing bonus to employees computed as a percentage of net income.
(c) Additional depreciation on factory machinery because of an error in computing depreciation for the previous year.
(d) Rent received from subletting a portion of the office space.
(e) A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of $725,000.
(f) A reduction in the Allowance for Doubtful Accounts balance because the account appears to be considerably in excess of the probable loss from uncollectible receivables.
Question: Below is the Retained Earnings account for the year 2017 for Acadian Corp.
Retained earnings, January 1, 2017 \(257,600
Add:
Gain on sale of investments (net of tax) \)41,200
Net income 84,500
Refund on litigation with government, related to
the year 2014 (net of tax) 21,600
Recognition of income earned in 2016, but omitted
from income statement in that year (net of tax) 25,400 172,700
430,300
Deduct:
Loss on discontinued operations (net of tax) 35,000
Write-off of goodwill (net of tax) 60,000
Cumulative effect on income of prior years in changing
from LIFO to FIFO inventory valuation in 2017 (net of tax) 23,200
Cash dividends declared 32,000 150,200
Retained earnings, December 31, 2017 $280,100
Instructions
Prepare a corrected retained earnings statement. Acadian Corp. normally sells investments of the type mentioned above. FIFO inventory was used in 2017 to compute net income.
How can information based on past transactions be used to predict future cash flows?
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