Q1P - Intermediate Accounting (Kieso)

Question

(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.

Step-by-Step Solution

Answer

On December 31, 2017, the retained earnings statement balance was $2,146,000.

Step 1: Meaning of Common Stock

The term common stock denotes the ownership of the assets and liabilities of a company owned by an investor. Common stock is also known as voting and ordinary stock.

Step 2: Preparation ofincome statement of December 31, 2017

Dickinson Company
Income Statement
For the year ended December 31, 2017
Sales Revenue		$25,000,000
Cost of Goods Sold		16,000,000
Gross profit		9,000,000
Selling and administrative expenses		4,700,000
Income from operations		$4,300,000
Other revenue and gains
Interest revenue	70,000
Gain on sale of investments	110,000
		180,000
Other expenses and Losses
Write-off of goodwill	($820,000)
Loss from flood damage	($390,000)
		1,210,000
Income from continuing operations before income tax		3,270,000
Income tax		1,244,000
Income from continuing operations		$2,026,000
Discontinuing Operations
Loss on operations net of applicable tax	($90,000)
Loss on disposal	($440,000)
		530,000
Net Income		$1,496,000
Earnings per share
Income from continuing operations		$3.892
Discontinuing operations
Loss on operations	(0.18)
Loss on disposal	(0.88)
		($1.06)
Net Income		$2.832

Working Notes

1. Calculation of Income from continuing operations

 

$\begin{array}{c}\mathbf{Income}\mathbf{From}\mathbf{Continuing}\mathbf{operations}\mathbf{per}\mathbf{share}\mathbf{=}\frac{(\mathbf{Income}\mathbf{From}\mathbf{Continuing}\mathbf{operations}\mathbf{-}\mathbf{Dividend}\mathbf{Declared}\mathbf{on}\mathbf{preferred}\mathbf{stock})}{\mathbf{Number}\mathbf{of}\mathbf{shares}\mathbf{outstanding}}\\ \mathbf{=}\frac{\$2,026,000-\$80,000}{500,000}\\ \mathbf{=}\mathbf{3}\mathbf{.}\mathbf{892}\end{array}$

2.Loss of operations

 $\begin{array}{c}\mathbf{Loss}\mathbf{on}\mathbf{operations}\mathbf{=}\frac{\mathbf{Loss}\mathbf{on}\mathbf{operations}}{\mathbf{Number}\mathbf{of}\mathbf{shares}\mathbf{outstanding}}\\ \mathbf{=}\frac{\$90,000}{500,000}\\ \mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{18}\end{array}$

3.Loss on disposal

$\begin{array}{c}\mathbf{Loss}\mathbf{on}\mathbf{disposal}\mathbf{=}\frac{\mathbf{Loss}\mathbf{on}\mathbf{disposal}}{\mathbf{Number}\mathbf{of}\mathbf{shares}\mathbf{outstanding}}\\ \mathbf{=}\frac{\$440,000}{\mathbf{500},\mathbf{000}}\\ \mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{88}\end{array}$

Step 3: Preparation ofretained earnings statement

Dickinson Company
Retained Earnings Statement
For the year ended December 31, 2017
Retained Earnings on January 1, 2017		$980,000
Add: Net income		1,496,000
		2,476,000
Less:
Dividends- Preferred Stock	$80,000
Dividends-Common Stock	250,000
		330,000
Retained Earnings on December 31, 2017		$2,146,000