Question 4P-A - Intermediate Accounting (Kieso)

Question

The following account balances were included in the trial balance of Twain Corporation at June 30, 2017.

Sales revenue                                                                                        \(1,578,500     

Depreciation expense (office furniture and equipment)                        \)7,250

Sales discounts                                                                                     \(31,150 

Cost of goods sold                                                                                \)896,770 

Property tax expense                                                                            \(7,320 

Salaries and wages expense (sales)                                                     \)56,260 

Bad debt expense (selling)                                                                    \(4,850 

Sales commissions                                                                               \)97,600 

Maintenance and repairs expense (administration)                              \(9,130

Travel expense (salespersons)                                                             \)28,930 

Delivery expense                                                                                   \(21,400 

Office expense                                                                                      \)6,000 

Entertainment expense                                                                         \(14,820 

Sales returns and allowances                                                               \)62,300 

Telephone and Internet expense (sales)                                                \(9,030 

Dividends received                                                                                \)38,000 

Depreciation expense (sales equipment)                                              \(4,980 

Interest expense                                                                                    \)18,000 

Maintenance and repairs expense (sales)                                             \(6,200 

Income tax expense                                                                              \)102,000 

Miscellaneous selling expenses                                                            \(4,715 

Depreciation understatement due to error—2014 (net of tax)               \)17,700

Office supplies used                                                                             \(3,450 

Telephone and Internet expense (administration)                                 \)2,820

Dividends declared on preferred stock                                                 \(9,000 

Dividends declared on common stock                                                  \)37,000

The Retained Earnings account had a balance of $337,000 at July 1, 2016. There are 80,000 shares of common stock outstanding.

Instructions 

(a) Using the multiple-step form, prepare an income statement and a retained earnings statement for the year ended June 30, 2017.

Step-by-Step Solution

Answer

The net income of the company is $221,525.

The balance in the statement of retained earnings is $494,825.

Meaning of Multi-Step Income Statement

A multi-step income statement follows a specific format to present the revenues and expenses of a business concern. It represents the operating and non-operating earnings and expenses separately. 

Preparation of multi-step income statement

In the books of Twain Corporation Multi-step Income Statement For the year ended June 30, 2017
Particulars	Details	Amounts ($)
Sales revenue		1,578,500
Less: Sales discount	31,150
Less: Sales returns and allowances	62,300	(93,450)
Net sales		1,485,050
Less: Cost of goods sold		(896,770)
Gross profit		588,280
Operating expenses
Sales commissions	97,600
Salaries and wages	56,260
Travel expense	28,930
Delivery expense	21,400
Entertainment expense	14,820
Telephone and internet expense	9,030
Maintenance and repairs expense	6,200
Depreciation expense	4,980
Bad debt expense	4,850
Miscellaneous selling expense	4,715	(248,785)
Administrative expenses
Maintenance and repair expense	9,130
Property tax expense	7,320
Depreciation expense	7,250
Supplies expense	3,450
Telephone and internet expense	2,820
Miscellaneous office expenses	6,000	(35,970)
Operating income		303,525
Other gains and revenues
Dividend revenue		38,000
Other expenses and losses
Interest expense		(18,000)
Income before tax		323,525
Less: Income tax expense		(102,000)
Net income		$221,525
Earnings per share ($221,525-9000)/80000		$2.66

Preparation of retained earnings statement

In the books of Twain Corporation Retained Earnings Statement For the year ended June 30, 2017
Particulars	Amounts ($)
Balance as on July 1, 2016	337,000
Correction of depreciation understatement	(17,700)
Add: Net income	221,525
Less: Dividend declared on preferred stock	(9,000)
Less: Dividend declared on common stock	(37,000)
Balance as on June 30, 2017	$494,825