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Exam 13: The Complete Income Statement

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Question 31

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Which one of the following should be NOT reported net of income taxes?

A) Loss on disposal of segment
B) Cumulative adjustments resulting from a change in principle
C) Bad debt expense associated with a bankrupt customer
D) Gains on disposal of segment

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Question 32

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Mountain Corp. experienced the following events and transactions during 2017: $1 =$ Dividends declared and paid to Mountain's shareholders $2 =$ Cost of goods sold $3 =$ Gain on disposal of a major segment of the business $4=$ Depreciation expense $5=$ Gain from early debt retirement Using the numbers of the events and transactions, identify which of the following sequences is the correct order for presenting the items on the income statement.

A) 5, 1, 3, 2
B) 2, 4, 5, 3
C) 4, 5, 2, 3
D) 2, 4, 3, 5, 1

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Question 33

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Match each item to financial statement reporting section that will be reported on a company’s financial statements,You may use each choice more than once or not at all.

Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company's dividends in any one year. The 2017 income statement data for the company is as follows: $\begin{array} { | l | r | } \hline \text { Net sales } & \$ 840,000 \\\hline \text { Less: Cast of goads sald } & 500,000 \\\hline \text { Grass profit } & \$ 340,000 \\\hline \text { Selling and administrative expenses } & 120,000 \\\hline \text { Net aperating incame } & \$ 220,000 \\\hline \text { Gain an sale of securities } & \mathbf { 2 4 , 0 0 0 } \\\hline \text { Interest expense } & ( 4,000 ) \\\hline \text { Net income fram continuing aperations befare tax } & \$ 240,000 \\\hline \text { Less: Income tax } & \underline { 51,200 } \\\hline \text { Net income fram continuing aperations } & \$ 180,000 \\\hline \text { Dispasal of segment (net of tax) } & \mathbf { 2 2 , 0 0 0 } \\\hline \text { Net income before change in accounting principle } & \$ 210,000 \\\hline \text { Income effect due to change in accounting principle } & \underline { 52,000 } \\\hline \text { Net income } & \$ 262,000 \\\hline\end{array}$ What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of income before disposal of segment and change in accounting principle?

Match each item to financial statement section.

On the income statement, the loss from selling an independent business component of the company is reported as a(n)

The following are the revenue and expense accounts of the current year for ABCO Corporation: $\begin{array}{lr}\text { Sales revenue } & \$ 200,000 \\\text { Interest revenue } & 3,000 \\\text { Interest expense } & 6,000 \\\text { Gain from sale of land } & 2,700 \\\text { Cost of goods sold } & 120,000 \\\text { Administrative expense } & 39,000 \\\text { Loss on disposal of segment } & 45,000\end{array}$ All items are before income taxes. The income tax rate is 20%. Calculate the gross profit that should be disclosed on the income statement.

One objective of financial reporting is to provide information that is

How are operating transactions that are not part of the normal operations of a company reported on the financial statements?

On January 1, total assets and liabilities had a fair market value of $21,000 and $8,000, respectively. On December 31, total assets and liabilities were $30,000 and $7,000, respectively. During the year, $9,000 of dividends were declared and paid and $3,000 of stock was issued. Calculate net income for the year.

The matching process measures net income by comparing

Badger, Inc. is planning a major stock issuance in early 2017. During 2016, the company reported net income from operations of $530,000 before taxes. The items below describe major events that occurred during 2016. 1. A $52,000 gain was recognized on the sale of a subsidiary 2. Inventory was written down by $21,000 due to obsolescence 3. Casualty loss of $320,000 4. A $31,000 gain was recognized due to the adoption of a new FASB statement The company's tax rate is 30 percent. A. Which items should not be reported as a component of income from continuing operations? B. Suppose management decided to exclude all of the above items from income from continuing operations. What effect might this have on investor and creditor decisions?

Cabell Inc. reported 'income from operations before taxes' in the amount of $402,000 before including the following items for the year ending December 31, 2017: .On December 31, 2017, borrowed long-term debt of $50,000 that limits dividends to 10 percent of net income from continuing operations .$21,000 unrealized gain from fair value adjustment related to available-for-sale investments .$30,000 loss recognized on the sale of a trading security .$58,000 loss recognized on a lawsuit relating to patent violations .$11,000 government fine for environmental violation .$63,000 write-down of obsolete inventory .$25,000 loss on the disposal of a segment. The company's income tax rate is 30 percent. No taxes have been considered in any information provided. Prepare a calculation of income from operations starting with income from operations before taxes, as tentatively reported. Omit the heading. Be sure to label correctly.

What is the definition of a business segment and what special reporting is required for discontinued segments?

Hamilton Corp. had the following infrequent income statement items during 2016: .$45,000 of dividends received from a stock investment .$20,000 gain on the sale of a plant asset which became outdated because of new technology .$19,000 loss due to the sale of treasury stock at a price less than its original cost .$34,000 fair value adjustment increase to market for available-for-sale investments .$50,000 interest expense for the year of which only $42,000 was actually paid How much should Hamilton report as part of 'income from continuing operations'?

Intraperiod tax allocation

Why are losses resulting from employee layoffs and write-downs such as inventory and receivables reported as 'other expenses and losses'?

On the income statement, a gain from the sale of stock is reported as

On the income statement, interest expense is reported as a(n)

On January 1 and December 31, 2017, retained earnings were $23,000 and $42,000, respectively. During the year, the only dividends were an ordinary stock dividend recorded at $11,000. Calculate net income for 2017.