Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 4: Q5P (page 188)

Question: Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017.

(000 omitted)

Net sales revenue \(640,000

Costs and expenses

Cost of goods sold \)500,000

Selling, general, and administrative expenses 66,000

Other, net 17,000

583,000

Income before income tax 57,000

Income tax 19,400

Net income 37,600

Retained earnings at beginning of period, as previously reported 141,000

Adjustment required for correction of error (7,000)

Retained earnings at beginning of period, as restated 134,000

Dividends on common stock (12,200)

Retained earnings at end of period \(159,400

Additional facts are as follows.

1. “Selling, general, and administrative expenses” for 2017 included a charge of \)8,500,000 that was usual but infrequently occurring.

2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000.

3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).

4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.

Instructions

Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)

Short Answer

Expert verified

As per the given scenario, the Nerwin Company requires some modifications in its presentation to reflect the data accurately.

Also, accurate presentation facilitates the users to draw effective financial decisions.

Step by step solution

01

Meaning of Financial Reporting

Financial reporting refers to the process of disclosing the financial data of a business concern with its associated stakeholders. The companies usefinancial statements to report their information to interested parties.

02

Requirements for appropriate presentation

  1. The selling and administration expenses include a charge of $8,500,000 that was usual but infrequently occurring. The same should be reported as anextraordinary itembecause such an event is non-recurring.

  2. Loss on sale of equipment is thenon-recurringactivity of the business entity; hence the same should be disclosed separately under extraordinary items. Also, the remaining balance, i.e., $11,000,000, should be considered as other expenses, and a respective loss of $6,000,000 should be reported as an extraordinary item.

  3. The error correction treatment is correct because the same should be adjusted in the opening balance of theprofit and loss account.

  4. The Nerwin Company should disclose the earnings per share below the net income in the income statement after deducting the preferred dividend from the net income.

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

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.

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.

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.

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

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.)
See all solutions

Recommended explanations on Business Studies Textbooks

Business Development

Read Explanation

Business Case Studies

Read Explanation

Business Operations

Read Explanation

Corporate Finance

Read Explanation

Managerial Economics

Read Explanation

Introduction to Business

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