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Chapter 4: 6BE (page 181)

During 2017, Williamson Company changed from FIFO to weighted-average inventory pricing. Pretax income in 2016 and 2015 (Williamson’s first year of operations) under FIFO was \(160,000 and \)180,000, respectively. Pretax income using weighted-average pricing in the prior years would have been \(145,000 in 2016 and \)170,000 in 2015. In 2017, Williamson reported a pretax income (using weighted-average pricing) of $180,000. Show comparative income statements for Williamson, beginning with “Income before income tax,” as presented on the 2017 income statement. (The tax rate in all years is 30%.)

Short Answer

Expert verified

The net income for 2017 is $126,000.

Step by step solution

01

Meaning of Inventory Valuation Method

Inventory valuation methods are used to measure the inventory available in a business and used by the business in its production function. The four main inventory valuation methods are LIFO, FIFO, specific identification, and weighted average inventory.

02

Calculation of Tax for the years 2017, 2016, and 2015 on pretax income

TaxExpenseFor2017=Pretaxincome×Taxrate=$180,000×30%=$54,000

TaxExpenseFor2016=Pretaxincome×Taxrate=$145,000×30%=$43,500

TaxExpenseFor2015=PretaxIncome×Taxrate=$170,000×30%=$51,000

03

Calculation of net income

Comparative Income Statement for Williamson Company

Particulars

2017

2016

2015

Income before Income tax

$180,000

$145,000

$170,000

Income Tax expense

$54,000

$43,500

$51,000

Net Income

$126,000

$101,500

$119,000

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Most popular questions from this chapter

Question: What are the two ways that other comprehensive income may be displayed (reported)?

(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.

State some of the more serious problems encountered in seeking to achieve the ideal measurement of periodic net income. Explain what accountants do as a practical alternative.

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information.

(b) What are P&G’s primary revenue sources?

(c) Compute P&G’s gross profit for each of the years 2012–2014. Explain why gross profit decreased in 2014.

(d) Why does P&G make a distinction between operating and nonoperating revenue?

(e) What financial ratios did P&G choose to report in its “Financial Summary” section covering the years 2009–2014?

Question: At December 31, 2016, Shiga Naoya Corporation had the following stock outstanding.

10% cumulative preferred stock, \(100 par, 107,500 shares \)10,750,000

Common stock, \(5 par, 4,000,000 shares 20,000,000

During 2017, Shiga Naoya did not issue any additional common stock. The following also occurred during 2017.

Income from continuing operations before taxes \)23,650,000

Discontinued operations (loss before taxes) \(3,225,000

Preferred dividends declared \)1,075,000

Common dividends declared $2,200,000

Effective tax rate 35%

Instructions

Compute earnings per share data as it should appear in the 2017 income statement of Shiga Naoya Corporation. (Round to two decimal places.)
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