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Chapter 4: Question 5BE (page 181)

Stacy Corporation had income from operations of \(7,200,000. In addition, it suffered an unusual and infrequent pretax loss of \)770,000 from a volcano eruption, interest revenue of \(17,000, and a write-down on buildings of \)53,000. The corporation's tax rate is 30%. Prepare a partial income statement for Stacy beginning with income from operations. The corporation had 5,000,000 shares of common stock outstanding during 2017.

Short Answer

Expert verified

The earnings per share of Stacy Corporation is $0.90.

Step by step solution

01

Meaning of Pretax earnings

Pretax earnings mean the amount of income before deducting any income taxes from it.

02

Preparation of Partial Income Statement

Particulars

Amount ($)

Income from operations

$7,200,000

Other Revenues and Gains

Interest Revenue

$17,000

Other Expenses and Losses

Loss due to Volcano Eruption

($770,000)

Impairment Loss-Building

($53,000)

Income before taxes

$6,394,000

Income Tax @30%

$1,918,200

Net Income

$4,475,800

Earnings per Share

$0.90

Working Note:

  1. Calculation of Earnings per share

Earningpershare=NetincomeOutstandingcommonstock=$4,475,8005,000,000Shares=$0.90

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Most popular questions from this chapter

The non-controlling interest section of the income statement is:

(a) required under GAAP but not under IFRS.

(b) required under IFRS but not under GAAP.

(c) required under IFRS and GAAP.

(d) not reported under GAAP or IFRS.

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.

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

(Multiple-Step and Single-Step Statements) The accountant of Latifa Shoe Co. has piled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2017.

Rent revenue \(29,000

Interest expense 18,000

Market appreciation on land above cost 31,000

Salaries and wages expense (selling) 114,800

Supplies (selling) 17,600

Income tax 37,400

Salaries and wages expense (administrative) \)135,900

Other administrative expenses 51,700

Cost of goods sold 496,000

Net sales 980,000

Depreciation on plant assets (70% selling, 30% administrative) 65,000

Cash dividends declared 16,000

There were 20,000 shares of common stock outstanding during the year.

Instructions

  1. Prepare a multiple-step income statement.
  2. Prepare a single-step income statement.
  3. (c) Which format do you prefer? Discuss.

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?
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