Shehab Eldin Mohamed Saber - 191133

EX4-5: (Multiple-step and Extraordinary Items) The following

balances were taken from the books of Parnevik Corp. on December
31, 2010
PARNEVIC CORP.
Income Statement
For the Year Ended December 31,2010
Sales Revenue
Sales $1,280,000
Less: Sales returns and allowances $150,000
Sales discounts $45,000 195,000
Net sales revenue 1,085,000
Cost of goods sold 621,000
Gross profit 464,000

Operating Expenses
Selling expenses 194,000
Administrative and general expense 97,000 291,000
Income from operations 173,000
Other Revenues and Gain
Interest revenue 86,000
259,000
Other Expenses and Losses
Interest expense 60,000
Income before tax and extraordinary item 199,000
Income tax (199,000 x 0.34) 67,660
Income before extraordinary item 131,340
Loss from earthquake damage 120,000
Less: Applicable tax reduction (120,000 x 0.34) 40,800 79,200
Net income $52,140

Per Share of Common Stock:

Income before extraordinary item (131,340 / 100,000) $1.31
Extraordinary item (net of tax) (0.79)
Net income (52,140 / 100,000) $0.52)

EX4-9: (Earnings Per Share) The stockholders’ equity section of

Sosa Corporation appears below as of December 31, 2010
Shehab Eldin Mohamed Saber - 191133

SOSA CORPORATION
Income Statement
For the Year Ended December 31,2010
Computation of net income:
2010 net income after tax $33,000,000
2010 net income before tax [33,000,000/ (1 – 0.34)] 50,000,000
Add back major casualty loss 12,000,000
Income from operation 62,000,000
Income taxes (34% x 62,000,000) 21,080,000
Income before extraordinary item 40,920,000
Extraordinary item:
Casualty loss $12,000,000
Less: Applicable income tax reduction 4,080,000 7,920,000
Net income $33,000,000
Net income $33,000,000
Less: Provision for preferred dividends (6% x 4,500,000) 270,000
Income available to common stockholders 32,730,000
Common stock shares ÷ 10,000,000
Earnings per share $3.27*

Income statement presentation:

Per share of common stock:
Income before extraordinary item $4.06*
Extraordinary item, net of tax (0.79) *
Net income $3.27

40,920,000−270,000
* 10,000,000 = $4.06 *

7,920,000
* 10,000,000 = $0.79 *

Problem 4-2: Single-step Income, Retained Earnings, Periodic

Inventory) Presented below is the trial balance of Thompson
Corporation at December 31, 2010.
Shehab Eldin Mohamed Saber - 191133

THOMPSON CORPORATION
Income Statement
For the Year Ended December 31,2010
Revenues
Net sales (1,100,000 – 14,500 – 17,500) $1,068,000
Gain on sale of land 30,000
Rent revenue 18,000
Total revenues 1,116,000
Expenses
Cost of goods sold* 645,000
Selling expenses 232,000
Administrative expenses 99,000
Total expenses 976,000
Income before income tax 140,000
Income tax 53,900
Net income $86,100
Earnings per share (86,100 / 30,000) $2.87
*Cost of goods sold can be verified as follows: $89,000
Merchandise inventory, Jan 1
Purchases $610,000
Less: purchase discounts 10,000
Net purchases 600,000
Freight in 20,000 620,000
Merchandise available for sale 709,000
Less: merchandise inventory, Dec,31 64,000
Cost of goods sold $645,000

THOMPSON CORPORATION
Retained Earnings Statement
For the Year Ended December 31,2010
Retained earnings, January 1 $160,000
Net income 86,100
246,100
Less: cash dividends 45,000
Retained earnings, December 31 $201,000

Problem 4-5: (Irregular Items) Presented below is a combined single-step income and
retained earnings statement for Nerwin Company for 2010
Shehab Eldin Mohamed Saber - 191133

1- The usual but infrequently occurring charge of $8,500,000 should be disclosed

separately, assuming it is material. This charge is shown above income before
extraordinary items and would not be reported net of tax. This item should be separately
disclosed to inform the users of the financial statements that this item is nonrecurring and
therefore may not impact next year’s results. Furthermore, trend comparison may be
misleading if such an item is not highlighted and adjustments made. The item should not
be considered extraordinary because it is usual in nature.

2- The extraordinary item of $6,000,000 should be reported net of tax in a separate section
for extraordinary items. An adjustment should be made to income taxes to report this
amount at $21,400,000. The $2,000,000 tax effect of this extraordinary item should be
reported with the extraordinary item. The reason for the separate disclosure is much the
same as that given above.

3- The adjustment required for correction of an error is inappropriately labeled and also
should be handled in current and further periods through the income statements. Catch up
adjustments are not permitted. To restate financial statements every time a change in
estimate occurred would be extremely costly. In addition, adjusting the beginning balance
of retained earnings is inappropriate as the increased charge in this case affects current
and future income statements.

4- Earnings per share should be reported on the face of the income statement and not in the
notes to the financial statements. Because such importance is ascribed to this statistic, the
profession believes it necessary to highlight the earnings per share figure. In this case the
company should report both income before extraordinary item and net income on a per
share basis.