Q9E. - Intermediate Accounting (Kieso)

Question

(Multiple-Step Statement with Retained Earnings Statement) Presented below is information related to Ivan Calderon Corp. for the year 2017. 

Net sales $1,300,000 Write-off of inventory due to obsolescence 80,000

Cost of goods sold 780,000 Depreciation expense omitted by accident in 2016 55,000

Selling expenses   65,000 Casualty loss                                               50,000

Administrative expenses 48,000   Cash dividends declared                       45,000

Dividend revenue 20,000 Retained earnings at December 31, 2016        980,000

Interest Revenue                     7,000                   

 Effective tax rate of 34% on all items                

Instructions

1. Prepare a multiple-step income statement for 2017. Assume that 60,000 shares of common stock are outstanding for the entire year.
2. Prepare a separate retained earnings statement for 2017.

Step-by-Step Solution

Answer

a) EPS equals $3.34

b) Retained earnings statement has a balance of $1,099,340.

Meaning of Interest Revenue

Interest revenue refers to the amount of money received by a business or an individual from investing. It is reported in the income statement under the head Non-Operating Expenses.

Preparing Multiple Step Income Statement

Ivan Calderon Corporation
Income Statement
For the Year Ended December 31, 2017
Net Sales		1,300,000
Cost of Goods sold		780,000
Gross Profits		520,000
Operating expenses
Selling expense	65,000
Administrative expense	48,000
Total operating expenses		113,000
Income from Operations		407,000
Other Revenues and Gains
Dividend Revenue	20,000
Interest Revenue	7,000
		27,000
Other Expenses and Losses
Write off inventory due to obsolescence.		80,000
Casualty Loss		50,000
Income before Tax		304,000
Income Tax expense		103,360
Net Income		$200,640
Earnings per Share		$3.34

Working Note: 

1. Calculation of Earnings per Share

$\begin{array}{rcl}\mathbf{Earnings}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{share}& \mathbf{=}& \mathbf{Net}\mathbf{ }\mathbf{Income}\mathbf{÷}\mathbf{Outstanding}\mathbf{ }\mathbf{common}\mathbf{ }\mathbf{stock}\\ & \mathbf{=}& \mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{640}\mathbf{÷}\mathbf{60}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{.}\mathbf{34}\end{array}$

Preparing Separate Retained Earnings Statement for 2017

Ivan Calderon Corp.
Retained Earnings Statement
For the Year Ended December 31, 2017
Retained Earnings On December 31, 2016	980,000
Depreciation Expense net of tax	36,300
Adjusted Retained earnings	943,700
Add:
Net Income	200,640
Less: Cash Dividend Declared	45,000
Retained earnings balance on December 31, 2017	1,099,340

Working Note:

1. Calculation of Depreciation Expense

$\begin{array}{rcl}\mathbf{Depreciation}\mathbf{ }\mathbf{Expense}& \mathbf{=}& \mathbf{Amount}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{Depreciation}\mathbf{\times }\left(1-\mathrm{Tax} \mathrm{rate}\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{55}\mathbf{,}\mathbf{000}\mathbf{\times }\left(1-0.34\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{36}\mathbf{,}\mathbf{300}\end{array}$