Log out Go to App
Go to App

Learning Materials

Features

Discover

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’s 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

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question: 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.

Question: O’Malley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O’Malley Corporation provides you with the following income statement which O’Malley plans to submit to the bank.

O’MALLEY CORPORATION

INCOME STATEMENT

Sales revenue \(850,000

Dividends 32,300

Gain on recovery of insurance proceeds from

earthquake loss 38,500

920,800

Less:

Selling expenses \)101,100

Cost of goods sold 510,000

Advertising expense 13,700

Loss on obsolescence of inventories 34,000

Loss on discontinued operations 48,600

Administrative expense 73,400 780,800

Income before income tax 140,000

Income tax 56,000

Net income $84,000

Instructions

Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.

Question: As audit partner for Grupo and Rijo, you are in charge of reviewing the classification of unusual items that have occurred during the current year. The following material items have come to your attention.

1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed.

2. An automobile dealer sells for \(137,000 an extremely rare 1930 S type Invicta which it purchased for \)21,000 10 years ago. The Invicta is the only such display item the dealer owns.

3. A drilling company during the current year extended the estimated useful life of certain drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered.

4. A retail outlet changed its computation for bad debt expense from 1% to ½ of 1% of sales because of changes in its customer clientele. Concepts for Analysis 191 192 Chapter 4 Income Statement and Related Information.

5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries.

6. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes.

7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved.

8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year.

9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year.

10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.

11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers. This represents a strategic shift in the company business.

Instructions

From the foregoing information, indicate in what section of the income statement or retained earnings statement these items should be classified. Provide a brief rationale for your position.

Question: What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

Perlman Land Development, Inc. purchased land for \(70,000 and spent \)30,000 developing it. It then sold the land for \(160,000. Sheehan Manufacturing purchased land for a future plant site for \)100,000. Due to a change in plans, Sheehan later sold the land for \(160,000. Should these two companies report the land sales, both at gains of \)60,000, in a similar manner?
See all solutions

Recommended explanations on Business Studies Textbooks

Business Development

Read Explanation

Change Management

Read Explanation

Organizational Behavior

Read Explanation

Strategic Analysis

Read Explanation

Corporate Finance

Read Explanation

Organizational Communication

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free