Chapter 4

The Income Statement and Statement of Cash

Flows

EXERCISES
Exercise 4-1Requirement 1
APEX COMPUTER CORPORATION
Income Statement
For the Year Ended December 31, 2011
Revenues and gains:
Sales ...............................................................................
Interest revenue .............................................................
Gain on sale of equipment .............................................
Total revenues and gains ............................................
Expenses and losses:
Cost of goods sold .........................................................
Administrative expense...................................................
Selling expense...............................................................
Restructuring costs ........................................................
Interest expense .............................................................
Income tax expense *.....................................................
Total expenses and losses ...........................................
Income before extraordinary item .....................................
Extraordinary item:
Loss from hurricane damage (net of $120,000 tax benefit) .....
Net loss .............................................................................

$3,400,000
35,000
30,000
3,465,000
$2,250,000
450,000
150,000
400,000
20,000
78,000
3,348,000
117,000
(180,000)
$ (63,000)

Earnings per share:

Income before extraordinary item .....................................
Extraordinary loss .............................................................
Net loss .............................................................................

$ .23
(.36)
$.(13)

* 40% x $195,000
Exercise 4-1 (concluded)
Requirement 2
APEX COMPUTER CORPORATION
Income Statement
Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

4-1

For the Year Ended December 31, 2011

Sales revenue .......................................................
Cost of goods sold ...............................................
Gross profit ..........................................................
Operating expenses:
Administrative expense......................................
Selling expense...................................................
Restructuring costs ............................................
Total operating expenses ...............................
Operating income .................................................
Other income (expense):
Interest revenue .................................................
Gain on sale of equipment .................................
Interest expense .................................................
Total other income (expense), net .................
Income before income taxes and
extraordinary item..............................................
Income tax expense *............................................
Income before extraordinary item ........................
Extraordinary item:
Loss from hurricane damage (net of $120,000 tax

$3,400,000
2,250,000
1,150,000
$450,000
150,000
400,000
1,000,000
150,000
35,000
30,000
(20,000)

benefit)

Net loss ................................................................

Earnings per share:
Income before extraordinary item ........................
Extraordinary loss ................................................
Net loss ................................................................

45,000
195,000
78,000
117,000
(180,000)
$ (63,000)
$ .23
(.36)
$.(13)

* 40% x $195,000

Exercise 4-2

BILIBONG COMPANY
Income Statement
For the Year Ended December 31, 2011

Income from continuing operations .....................................

Discontinued operations:
Loss from operations of discontinued component
The McGraw-Hill Companies, Inc., 2011
4-2

$ 500,000

Intermediate Accounting, 6/e

(including gain on disposal of $300,000) *.................................

Income tax benefit .............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................

(80,000)
32,000
(48,000)
$ 452,000

Earnings per share:

Income from continuing operations .....................................
Loss from discontinued operations ......................................
Net income ..........................................................................

$ 2.50
(.24)
$ 2.26

* Loss on discontinued operations:

Gain on sale of assets
Operating loss
Total before tax loss
Less: Income tax benefit (40%)
Net of tax loss

$300,000
(380,000)
(80,000)
32,000
$ (48,000)

Exercise 4-3Requirement 1
OTTOBONI CORPORATION
Income Statement
For the Year Ended December 31, 2011
Income from continuing operations .....................................

$600,000

Discontinued operations:
Loss from operations of discontinued component
(including impairment loss of $200,000) *.................................
Income tax benefit .............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................

(470,000)
188,000
(282,000)
$318,000

* Loss on discontinued operations:

Operating loss
Alternate Exercises and Problem Solutions

$ (270,000)
The McGraw-Hill Companies, Inc., 2011
4-3

Impairment loss ($2,100,000 1,900,000)

Net before-tax loss
Income tax benefit (40%)
Net after-tax estimated loss on discontinued operations

The McGraw-Hill Companies, Inc., 2011

4-4

(200,000)
(470,000)
188,000
$ (282,000)

Intermediate Accounting, 6/e

Exercise 4-3 (concluded)

Requirement 2
OTTOBONI CORPORATION
Income Statement
For the Year Ended December 31, 2011
Income from continuing operations .....................................

$ 600,000

Discontinued operations:
Loss from operations of discontinued component *
Income tax benefit ............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................

(270,000)
108,000
(162,000)
$ 438,000

* Includes only the operating loss during the year. There is no impairment loss.

Exercise 4-4Requirement 1

When an estimate is revised as new information comes to light,

accounting for the change in estimate is quite straightforward. We do not restate prior
years' financial statements to reflect the new estimate. Instead, we merely incorporate
the new estimate in any related accounting determinations from there on. If the aftertax income effect of the change in estimate is material, the effect on net income and
earnings per share must be disclosed in a note, along with the justification for the
change.
Requirement 2
$2,500,000
$400,000
x 1.5 years
600,000
1,900,000
(200,000)
1,700,000
__ 8.5
$ 200,000

Cost
Old annual depreciation ([$2,500,000 100,000] 6 years)
Depreciation to date (2009-2010)
Book value
Less new salvage value
Revised depreciable base
Estimated remaining life (10 years 1.5 years)
New annual depreciation

Alternate Exercises and Problem Solutions

The McGraw-Hill Companies, Inc., 2011

4-5

1.___ d

Purchase of equipment in

2.___ a
3.___ a

Payment of rent.
Collection of cash from

Exercise 4-5exchange for a note payable.

customers.
4.
a_
5.
b _
6.
c_
7.
b _
8.
a_
9.
b _
10.
c_
11.
a_

Payment of interest on debt.

Purchase of a bond of another company.
Issuance of common stock for cash.
Sale of land for cash.
Receipt of interest on a note receivable.
Receipt of principal on a note receivable.
Payment of cash dividends to shareholders.
Payment to suppliers of inventory.

Exercise 4-6Requirement 1

Siegfried & Royce

Statement of Cash Flows
For the Year Ended December 31, 2011
($ in thousands)

Cash flows from operating activities:

Net income
$1,410
Adjustments for noncash effects:
Depreciation expense
400
Changes in operating assets and liabilities:
Increase in accounts receivable
(270)
Increase in inventory
(80)
Increase in prepaid rent
(50)
Decrease in accounts payable
(80)
Decrease in administrative & other payables
(50)
Increase in income taxes payable
100
Net cash flows from operating activities
$1,380
Cash flows from investing activities:
Purchase of plant and equipment

(400)

Cash flows from financing activities:

Proceeds from issuance of common stock
500
Proceeds from note payable
500
Net cash flows from financing activities 1,000
Net increase in cash
The McGraw-Hill Companies, Inc., 2011
4-6

1,980
Intermediate Accounting, 6/e

Cash, January 1
Cash, December 31

Alternate Exercises and Problem Solutions

1,300
$3,280

The McGraw-Hill Companies, Inc., 2011

4-7

Requirement 2
Siegfried & Royce
Statement of Cash Flows
For the Year Ended December 31, 2011
($ in thousands)
Cash flows from operating activities:
Collections from customers
$12,230 (1)
Payment of rent
(300) (2)
Payment to inventory suppliers
(7,460) (3)
Payment for administrative & other exp.
(2,250) (4)
Payment of income taxes
(840) (5)
Net cash flows from operating activities
$ 1,380
(1) $12,500 less $270 increase in accounts receivable.
(2) $250 plus $50 increase in prepaid rent.
(3) $7,300 plus $80 increase in inventory plus $80 decrease in accounts payable.
(4) $2,200 plus $50 decrease in payables for admin. and other expenses.
(5) $940 less $100 increase in taxes payable.

The McGraw-Hill Companies, Inc., 2011

4-8

Intermediate Accounting, 6/e

PROBLEMS
Problem 4-1

AJAX COMPANY
Income Statement
For the Year Ended December 31, 2011

Sales revenue ......................................................

Cost of goods sold ..............................................
Gross profit .........................................................

$6,200,000
3,500,000
2,700,000

Operating expenses:
Administrative and selling ................................ $1,500,000
Restructuring costs ...........................................
250,000
Loss from landslide damage .............................
75,000
Total operating expenses ..............................
Operating income ...............................................
Other income (expense):
Interest revenue ................................................
Interest expense ...............................................
Loss on sale of equipment ................................
Income before income taxes and
extraordinary item ............................................
Income tax expense ............................................
Income before extraordinary item .......................
Extraordinary item:
Gain on sale of land (net of $800,000 tax expense) ...
Net income .........................................................

100,000
(150,000)
(40,000)

1,825,000
875,000

(90,000)
785,000
314,000
471,000
1,200,000
$1,671,000

Note:
1. The restructuring costs are not an extraordinary item.
2. The loss caused by the landslide is not an extraordinary item.

Problem 4-2Requirement 1
HUNTINGTON STEEL CORPORATION
Comparative Income Statements
For the Years Ended December 31
2011
Income from continuing operations before
income taxes [1] .......................................... $4,355,000
Alternate Exercises and Problem Solutions

2010
$3,475,000

The McGraw-Hill Companies, Inc., 2011

4-9

Income tax expense ..........................................

Income from continuing operations ..................
Discontinued operations:
Income from operations of discontinued
component (including gain on disposal of
$800,000 in 2011) [2] ........................................
Income tax expense .......................................
Income on discontinued operations ................
Net Income .......................................................

1,742,000
2,613,000

1,390,000
2,085,000

345,000
138,000
207,000
$2,820,000

325,000
130,000
195,000
$2,280,000

[1]

Income from continuing operations before income taxes:

2011
2010
Unadjusted
$3,900,000 $3,800,000
Add: Loss from discontinued operation
455,000
Deduct: Income from discontinued operation
(325,000)
Adjusted
$4,355,000 $3,475,000
[2]

Income from discontinued operations:

Operating income (loss)

Gain on disposal
Total

2011
$(455,000)
800,000
$ 345,000

2010
$ 325,000
$325,000

Problem 4-2 (concluded)

Requirement 2
The 2011 income from discontinued operations would include only the operating
loss of $455,000. Since no impairment loss is indicated ($7,000,000 6,200,000 =
$800,000 anticipated gain), none is included. The anticipated gain on disposal is not
recognized until it is realized, presumably in the following year.
Requirement 3
The 2011 income from discontinued operations would include the operating loss
of $455,000 as well as an impairment loss of $1,200,000 ($6,200,000 book value of
assets less $5,000,000 fair value).

The McGraw-Hill Companies, Inc., 2011

4-10

Intermediate Accounting, 6/e