Intermediate Accounting 1st Edition

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CHAPTER 5
Statements of Net Income and
Comprehensive Income
Solutions
Questions

Q5-1 There are several disadvantages or limitations of the income statements. (1) Certain
revenues, expenses, gains and losses cannot be measured reliably and are therefore not
reported on the income statements. (2) The measurement of income is dependent upon the
accounting methods selected. (3) Revenues, expenses, gains, and losses can be manipulated by
management. Even if management is not intentionally biasing the earnings figure, different
judgments will lead to different income numbers, resulting in a lack of comparability.

Q5-2 The income statement provides information about past performance. Therefore, this
information can help financial statements users evaluate past performance. In addition, it also
provides information to help predict future performance and assess risks or uncertainties of
achieving future cash flows.

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5-2 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Q5-3 No, net income is a component of comprehensive income. Comprehensive income is the
change in a company’s equity during a period, resulting from transactions and other events and
circumstances from non-owner sources. Comprehensive income includes net income and other
comprehensive income.

Q5-4 Earnings quality captures the degree to which reported income provides financial
statement users with useful information. This information is particularly effective in predicting
future firm performance.

Q5-5 Earnings management refers to the use of discretion that is afforded managers under the
accounting standards to inappropriately manipulate earnings to meet certain goals.

Q5-6 Permanent earnings are those earnings that are likely to continue into the future. For
example, sales revenue from a stable customer contributes to earnings in a fashion that is likely
to continue indefinitely into the future. Transitory earnings are those earnings that are unlikely
to continue in the future. For example, unusual items or infrequent items are usually transitory.

Q5-7 Revenues, expenses, gains, and losses can be included in net income. Other
comprehensive income can include the same elements, although it would be unusual to report
revenues in other comprehensive income.

Q5-8 No, a company cannot aggregate cost of goods sold, payroll costs, and administrative
expenses. Payroll costs are not a functional expense as they do not relate to the use of an
expense. Rather, they are a natural expense, relating to the source of an expense. Cost of goods
sold and administrative expenses are functional expenses.

Q5-9 A single-step income statement format combines all revenues and gains and all expenses
and losses into single categories. Detailed classification and numerous subcategories are not
reflected in a single-step income statement. A multiple-step income statement format reports
several subtotals before computing income from continuing operations and net income. The
multiple-step format tends to provide more useful information because it clearly separates
results achieved by regular operations of the entity from those generated by non-operating
activities. In addition, expenses are classified by function or nature. Therefore, the multiple-
step income statement is generally more transparent than the single-step income statement.

Q5-10 While U.S. GAAP and IFRS reporters could present the same statement of net income,
IFRS requires 6 key items to be reported on the statement of net income: 1. Revenue, 2.
Finance costs, 3. Share of income/loss of associates, 4. Tax expense, 5. After-tax profit or loss
on discontinued operations, and 6. Net Income, also called Net Profit or Net Loss.

Q5-11 IFRS requires 6 key items to be reported on the statement of net income: 1. Revenue, 2.
Finance costs, 3. Share of income/loss of associates, 4. Tax expense, 5. After-tax profit or loss
on discontinued operations, and 6. Net Income, also called Profit or Loss. A company is allowed
to report operating income, but is not required to present it.

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-3

Q5-12 Operating income is a key financial measure of performance for three reasons. First,
operating income reflects the results of the core operations of the business. Second, operating
income assists a financial statement user in comparing firms, regardless of their capital
structure. Finally, operating income provides a measure of income available to all outside
stakeholders.

Q5-13 Discontinued operations treatment applies to a component of the entity, which may or
may not be a business segment. After a company has determined that a portion of a business is
a component of an entity or a group of components of an entity, the disposal must represent a
strategic shift that has or will have a major effect on the operations and financial results of the
entity. If all of these conditions are met, then the disposal should be treated as a discontinued
operation under U.S. GAAP.

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5-4 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Q5-14 Procter & Gamble may be able to account for the sale as a discontinued operation. The
segment must first be defined as a component of an entity. If the company determines that a
portion of a business is a component of an entity or a group of components of an entity, the
disposal must represent a strategic shift that has or will have a major effect on the operations
and financial results of the entity. If all of these conditions are met, then the disposal should be
treated as a discontinued operation under U.S. GAAP.

Q5-15 Companies present net income on the income statement after discontinued operations.
Net income is the sum of the income from continuing operations, and gains or losses from
discontinued operations.

Q5-16 Items of other comprehensive income are not included in the computation of net
income. The elements of other comprehensive income (OCI) currently consist of unrealized
gains and losses from the available-for-sale portfolio of investment securities and derivatives
classified as cash flow hedges, foreign currency translation gains and losses, and unrecognized
pension costs (benefits) from adjustments needed to bring the accounting pension asset or
liability to the funded status of the pension plan. These items of revenue and expense are not
reported on the statement of net income, but rather are considered part of other
comprehensive income.

Q5-17 Companies have two choices in reporting comprehensive income. They can present two
statements - a statement of net income and a statement of comprehensive income. In this case,
the statement of comprehensive income must follow immediately after the statement of net
income (i.e., on the next page of the financial report). Alternatively, firms may present one
statement of comprehensive income. In this case, the statement of net income is combined
with a presentation of OCI and reported in one statement.

Q5-18 U.S. GAAP and IFRS both allow the one statement or two consecutive statement
approaches of reporting other comprehensive income. In the one-statement approach,
companies first present the elements of net income followed by the elements of OCI, netting to
the total comprehensive income for the period. Companies presenting in two statements are
required to include the statement of comprehensive income immediately after the statement
of net income (i.e., on the next page of the financial report). The statement of comprehensive
income begins with net income and then presents the components of other comprehensive
income, ultimately arriving at a figure for comprehensive income. When compared to U.S.
GAAP, IFRS allows companies to report different elements as other comprehensive income. For
example, IFRS allows the revaluation upward of property, plant and equipment

Q5-19 Yes, other comprehensive income can be reported on the statement of stockholders’
equity. However, presentation in the statement of stockholders’ equity cannot be the only
statement used to report other comprehensive income. Other comprehensive income must be
reported in either the statement of comprehensive income which includes the statement of net
income or the statement of comprehensive income which does not include the statement of
net income. The same information is provided under these two alternatives.

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-5

Q5-20 Although U.S. GAAP does not require a statement of stockholders’ equity, it is required
by the SEC. Thus, U.S. non-public companies are not required to provide the statement of
stockholders’ equity with their financial statements. However, most non-public companies do
include a statement of stockholders’ equity on a voluntary basis.

Q5-21 The statement of stockholders’ equity summarizes all the stockholders’ equity accounts
that include common stock, additional paid-in capital, retained earnings, accumulated other
comprehensive income, treasury stock and noncontrolling interests.

Q5-22 Financial statement analysis provides the tools and techniques necessary to evaluate a
company’s performance over time, relative to certain benchmarks, or compared to similar
entities.

Q5-23 Yes, auditors will use several types of financial statement analyses techniques to obtain
an overview of what is occurring in a company. For example, if an auditor observes that
accounts receivable are increasing as a percent of total assets, they may seek additional
information such as whether sales are also increasing, whether collections are decreasing, or
whether credit extension practices have been relaxed.

Q5-24 The term comparative financial statements describes financial information provided for
more than one reporting period. For example, companies include three years of income
statements in their annual reports. Comparative financial statements allow a user to compare
the company on a year-to-year basis.

Q5-25 Vertical analysis expresses financial information in relation to some relevant total or
amount within one year. Horizontal analysis examines the percentage change in financial
statement items from year to year.

Q5-26 Profitability is broader than the return on a company’s investments. It is a company’s

ability to generate a return for its shareholders based on its revenues or resources available,
like assets and equity.

Q5-27 Return on equity is computed as net income divided by average stockholders’ equity. It is
an indicator of the return a company is providing its shareholders based on the equity. Return
on assets is computed as net income divided by average total assets. Return on assets is an
indicator of the return a company is earning based on the investments in assets.

Q5-28 The profit margin is the percent of each dollar of sales remaining after covering the costs
of sales and other business expenses. It is what is remaining that can be reinvested in the
company or distributed to shareholders. Profit margin equals net income divided by sales
revenue.

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5-6 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Multiple Choice Questions

Solution to MC5-1

Choice d is correct.

This is the collection of an account receivable previously written off. The original write off would
have been Dr. Allowance and Cr. Accounts Receivable. The collection would have been recorded
in two transactions. The first would be to reestablish the account as Dr. Accounts Receivable
and Cr. Allowance. The second would be to treat the collection as if the account had never been
written off as Dr. Cash and Cr. Accounts Receivable. The net of the two journal entries is Dr.
Cash and Cr. Allowance. There is nothing here that could potentially affect income.

Solution to MC5-2

Choice c is correct.

All of the above items except number c are strategies used by management to manipulate and
manage earnings. When a company engages in research and development, it will result in
higher expenses. Under U.S. GAAP all research and development expenses must be expensed.

Solution to MC5-3

Choice b is correct.

Freight out is a selling expense, not part of the cost of inventory. (Freight in is a cost of
inventory.) Gain/loss on the sale of equipment held for disposal is associated with discontinued
operations and reported in the discontinued operations section.

Solution to MC5-4

Choice b is correct.

Mission Flowers' income from continuing operations is calculated as follows:

Sales revenue $ 775,000
Operating expenses (550,000)
Loss from strike (200,000)
Income from continuing operations before taxes 25,000
Income tax expense (8,750)
Income from continuing operations $ 16,250

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-7

The operating income from the subsidiary sold during the year is not included in income from
continuing operations but is reported net of tax as income from discontinued operations,
along with any gain or loss on the sale of the subsidiary.

Solution to MC5-5

Choice d is correct.

Income from continuing operations should be adjusted for all of the items. The $100,000 in
additional depreciation needs to be deducted from income from continuing operations. The
$200,000 loss from the strike by the supplier’s employees and the $500,000 flood loss should
be included in income from continuing operations. The inventory overstatement in the prior
year results in a cost of goods sold overstatement in the current year, so $300,000 should be
added back to income from continuing operations.

Allison Corporations adjusted income from continuing operations before tax is calculated as
follows:

Unadjusted income from continuing operations before tax $ 1,000,000

Less: Additional depreciation (100,000)

Less: Loss from strike (200,000)
Plus: Adjustment to COGS for inventory misstatement 300,000
Less: Loss from flood (500,000)

Adjusted income from continuing operations before tax $ 500,000

Solution to MC5-6

Choice a is correct.

There would be a loss on remeasurement of the component during Year 1. The net fair value of
the component would be its fair value of $500,000 less the $15,000 disposal costs, for a total of
$485,000. The loss on remeasurement would be the net fair value of $485,000 minus the
$850,000 carrying value of the component, for a total of $365,000.

The results of operations would be reported for Year 1 as a loss of $180,000 ($130,000 +
$50,000) and for Year 2 as $15,000. The amount that Moran should report for discontinued
operations in its Year 1 income statement would be the loss from operations for Year 1 of
$180,000 and the loss on remeasurement for Year 1 of $365,000, for a total of $545,000.

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5-8 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to MC5-7

Choice c is correct.

Comprehensive income includes all items included in net income, plus all other comprehensive
income items (pension funded status changes, unrealized gains and losses on available-for-sale
securities, foreign currency translation gains/losses, and unrealized gains/losses on the effective
portion of a cash flow hedge). The unrealized loss on the trading security and the loss on
discontinued operations are already included in net income, so comprehensive income is:

Net income $650,000

Foreign currency translation gain (net of tax)* 90,000

Comprehensive Income $740,000

* - Translation gain (net of tax) = $150,000 x (1 - 0.40) = $90,000

Solution to MC5-8

Choice b is correct.

The only item that fits is the unrealized gain on the available-for-sale security. The unrealized
gain on the trading security is included in income. Dividends are not included in income or other
comprehensive income (but as an adjustment to retained earnings). The other items in the list
are normal income statement items and thus are not part of other comprehensive income.

Solution to MC5-9

Choice d is correct.

The write down of the inventory will be a loss included in net income. While net income will
eventually be transferred to stockholders' equity, it will not go directly to equity. All the
remaining options are adjustments or entries directly posted to the stockholders' equity section
of the balance sheet.

The write-down of the available-for-sale securities will be reported in stockholders' equity as

accumulated other comprehensive income until the securities are sold. Treasury stock would be
a debit to stockholders' equity for $7,500 under the cost method. Issuances of common stock
are always recorded in stockholders' equity.

Brief Exercises

Solution to BE5-1
Item Advantage/Disadvantage
1. Can be manipulated and managed. Disadvantage

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-9

2. Assesses risks or uncertainties of achieving future cash Advantage

flows.
3. Depends on accounting methods selected. Disadvantage
4. Requires extensive judgment. Disadvantage
5. Predicts future performance. Advantage
6. Evaluates past performance. Advantage
7. Excludes certain items. Disadvantage

Solution to BE5-2
Advantage/Disadvantage Description
1. Can be manipulated and managed. e. Management can bias their judgments.
2. Depends on accounting methods c. Accounting policies determine amounts
selected. reported.
3. Predicts future performance. b. The income statements provide
predictive value.
4. Evaluates past performance. a. The income statements provide
confirmatory value.
5. Excludes certain items. d. Items cannot be measured reliably and
are therefore not reported on the income
statements.

Solution to BE5-3
Item Advantage/Disadvantage
1. Evaluates past performance. b. The income statements provide
confirmatory value.
2. Predicts future performance. d. Investors expect past growth to continue.
3. Assesses risks or uncertainties of a. The sale of a specialized piece of
achieving future cash flows. equipment is unlikely to reoccur in the
following year.
4. Excludes certain items. f. Pending lawsuits may not be reported.
5. Depends on accounting methods g. Managers can choose from several
selected. inventory cost flow assumptions.
6. Can be manipulated and managed. e. Managers manage earnings to meet
analysts’ forecasts.
7. Requires extensive judgment. c. Managers make estimates and
assumptions.

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Solution to BE5-4
Item Permanent/Transitory?
Selling expenses Permanent
Sales salaries expense Permanent
Unrealized loss on available-for-sale bonds Transitory
Interest income Permanent
Depreciation expense Permanent
Amortization expense Permanent
Interest expense Permanent
Loss on asset impairment Transitory
Loss on sale of discontinued operations-before tax Transitory
Gain due to flood damage Transitory
Sales Permanent
Gain on disposal of plant assets Transitory
Office supplies expense Permanent
Advertising expense Permanent
Office salaries expense Permanent
Gain on trading investments Transitory
Cost of goods sold Permanent

Solution to BE5-5

The common order of the items is:

1. Gross profit
2. Operating Income
3. Income from Continuing Operations
4. Net Income
5. Earnings per Share

Solution to BE5-6
Item Yes/No

Cost of goods sold No

General and administrative expenses No

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-11

Sales Yes
Net profit Yes
Interest expense Yes
Gross profit No
Share of income/loss of associates Yes
Income tax expense Yes
Operating profit No
Gain/loss from discontinued operations, net of taxes Yes
Profit from continuing operations No

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5-12 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to BE5-7
Carr Corporation
Income Statement (Single step format)
For the Year Ended December 31
Revenues and Gains
Sales $123,750
Interest Income 1,000
Dividend Income 560
Gain on Disposal of Plant Assets 986
Unrealized Gain on Trading Investments 2,000
Total Revenues and Gains $128,296

Expenses and Losses

Cost of Goods Sold $45,678
Selling Expenses 12,000
Sales Salaries Expense 3,570
Advertising Expense 4,000
Depreciation Expense 9,000
Office Salaries Expense 6,780
Office Supplies Expense 4,500
Loss on Asset Impairment 1,840
Accounting and Legal Fees 800
Interest Expense 2,100
Income Tax Expense at 40%* 15,211
Total Expenses and Losses (105,479)

Net Income $22,817

*Tax Expense = 40% x (Revenues – Expenses before tax) = $128,296 – $90,268 = $38,028 x 40% = $15,211.

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-13

Solution to BE5-8

A variety of presentations could be acceptable as long as the required items are included on the
income statement.
Carr Corporation
Statement of Profit and Loss (IFRS)
For the Year Ended December 31
Sales $123,750 Required
Less: Cost of Goods Sold (45,678)
Gross Profit $78,072

Operating Expenses:
Selling Expenses $19,570
General and Administrative Expenses 21,080
Total Operating Expenses (40,650)

Operating Profit $37,422

Interest Expense(Finance Costs) (2,100) Required

Interest Income 1,000

Other Revenues/Gains and Expenses/Losses 1,706

Profit Before Tax $38,028

Income Tax Expense at 40% (15,211) Required

Net Profit $22,817 Required

Additional disclosures:
Other Revenues/Gains and Expenses/Losses:
Dividend Income $560
Gain on Disposal of Plant Assets 986
Unrealized Gain on Trading Investments 2,000
Loss on Asset Impairment (1,840)
Other Revenues/Gains and
Expenses/Losses $1,706

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5-14 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Selling Expenses:
Sales Salaries Expense $3,570
Selling Expenses 12,000
Advertising Expense 4,000
Total Selling Expenses $19,570

General and Administrative Expenses:

Office Supplies Expense $4,500
Accounting and Legal Fees 800
Office Salaries Expense 6,780
Depreciation Expense 9,000
Total General and Administrative Expenses $21,080

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-15

Solution to BE5-9
Carr Corporation
Income Statement (Multiple-step format)
For the Year Ended December 31
Sales $123,750
Less: Cost of Goods Sold (45,678)
Gross Profit $78,072

Operating Expenses:
Selling Expenses:
Selling Expenses $12,000
Sales Salaries Expense 3,570
Advertising Expense 4,000 (19,570)

General and Administrative Expenses:

Depreciation Expense $9,000
Office Salaries Expense 6,780
Office Supplies Expense 4,500
Accounting and Legal Fees 800 (21,080)

Operating Income $37,422

Other Revenues and Gains

Gain on Disposal of Plant Assets $986
Unrealized Gain on Trading Investments 2,000
Dividend Income 560
Interest Income 1,000 4,546

Other Expenses and Losses

Loss on Asset Impairment (1,840)
Interest Expense (2,100) (3,940)

Income Before Tax $38,028

Income Tax Expense at 40% (15,211)

Net Income $22,817

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5-16 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to BE5-10
Carr Corporation
Income Statement (Condensed format)
For the Year Ended December 31
Sales $123,750
Less: Cost of Goods Sold (45,678)
Gross Profit $78,072

Operating Expenses:
Selling Expenses $19,570
General and Administrative Expenses 21,080
Total Operating Expenses (40,650)

Operating Income $37,422

Other Revenues/Gains and Expenses/Losses 606

Income Before Tax $38,028

Income Tax Expense at 40% (15,211)

Net Income $22,817

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-17

Carr Corporation: Supporting Schedules for Condensed Income Statement

Selling Expenses
Selling Expenses $12,000
Sales Salaries Expense 3,570
Advertising Expense 4,000
Total Selling Expenses $19,570

General and Administrative Expenses

Depreciation Expense $9,000
Office Salaries Expense 6,780
Office Supplies Expense 4,500
Accounting and Legal Fees 800
Total General and Administrative Expenses $21,080

Other Revenues/Gains and Expenses/Losses

Gain on Disposal of Plant Assets $986
Unrealized Gain on Trading Investments 2,000
Loss on Asset Impairment (1,840)
Dividend Income 560
Interest Income 1,000
Interest Expense (2,100)
Total Other Revenues and Expenses $606

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5-18 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to BE5-11

The disposal of Woorley’s Tools Division would qualify as a discontinued operation under IFRS.
The table below identifies the criteria under IFRS for classifying a discontinued operation and
whether the Tools Division disposal meets them.

Requirement (based on Exhibit 5.14) IFRS

What is a discontinued operation? Yes, the Tools Division is a component
of an entity held for sale or one that has
been disposed.
Does the discontinued portion of the Yes, the Tools Division is one of
business meet the definition of a Woorley’s main business segments, so
component of an entity to be considered a it represents a separate, major line of
discontinued operation? business.
Does the discontinued operation have to Not a requirement under IFRS.
represent a strategic shift that has or will
have a major impact on the entity?
Is the discontinued operation part of a Yes, it is part of a single coordinated
single coordinated disposal plan? plan.

Solution to BE5-12
Banks Corporation
Statement of Net Income
For the Year Ended December 31
Sales $8,000.00
Cost of Goods Sold 5,695.00
Gross profit $2,305.00
Selling, General and Administrative Expenses ($700 – [$700 x 15%]) 595.00
Depreciation and Amortization Expense 807.50
Income from Continuing Operations Before Tax $902.50
Income Tax Expense (at 40%) 361.00
Income (loss) from Continuing Operations $541.50

Discontinued Operations:
Income from Operations of Discontinued Operations, net of taxes of $299
$448.50
Gain on Disposal of Discontinued Operations, net of taxes of $94.8 142.20

Net Income $1,132.20

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-19

Supporting calculations:
Sales ($10,000 x 20%) $2,000.00
Cost of Goods Sold ($6,700 x 15%) 1,005.00
Gross profit 995.00
Selling, General and Administrative Expenses ($700 x 15%) 105.00
Depreciation and Amortization Expense ($950 x 15%) 142.50
Income Before Tax 747.50
Income Tax Expense (at 40%) 299.00
Income from Discontinued Operations $448.50

Solution to BE5-13
Steven Stores, Inc.
Statement of Comprehensive Income
For the Year Ended December 31
Sales $12,000
Less: Cost of Goods Sold (4,000)
Gross Profit $8,000

Operating Expenses:
Selling Expenses $3,500
General and Administrative Expenses 1,500
Total Operating Expenses (5,000)

Operating Income $3,000

Income Tax Expense at 40% (40% x $3,000) (1,200)
Net Income $ 1,800
Other Comprehensive Income
Unrealized Holding Gain on Available-for-sale 441
Investments, net of tax of $294
Comprehensive Income $ 2,241

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5-20 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to BE5-14
Steven Stores, Inc.
Statement of Comprehensive Income
For the Year Ended December 31
Net Income $1,800
Other Comprehensive Income
Unrealized Holding Gain on Available-for-sale
Investments, net of tax of $294 441
Comprehensive Income $ 2,241

Solution to BE5-15
Beginning Retained Earnings $1,250,000
Net Income 140,000
Dividends Declared (10,000)
Ending Retained Earnings $1,380,000

Solution to BE5-16
Beginning Common Stock $200,000
Beginning Additional Paid-in-Capital 775,000
Beginning Contributed Capital 975,000
Issuance of Common Stock 125,000
Ending Contributed Capital $1,100,000

Solution to BE5-17
Beginning Accumulated Other Comprehensive Income $345,000
Unrecognized Pension Costs (67,000)
Unrealized Losses on Available-for-Sale Investments (22,000)
Foreign Currency Translation Adjustments - Gain 13,000
Ending Accumulated Other Comprehensive Income $269,000

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-21

Solution to BE5-18
Percent
(in millions) 2016 2015 Change Change

Sales $63,762 61,890 $1,872 3.0%

Cost of Goods Sold 33,092 30,096 $2,996 10.0%
Gross Profit 30,670 31,794 ($1,124) (3.5%)
Selling, General & Administrative Expenses 15,335 15,897 ($562) (3.5%)
Research & Development Expense 7,052 7,844 ($792) (10.1%)
Interest Expense 145 142 $3 2.1%
Earnings Before Provision for Taxes 8,138 7,911 $227 2.9%
Provision for Taxes 2,848 2,769 $79 2.9%
Net Income $5,290 $5,142 $148 2.9%

From the change and percent change in each line item, we observe that cost of goods sold
increased 10%. Sales increased only 3%. Because the sales increase is less than the increase on
cost of goods sold, gross profit decreases. We also observe declines in both selling, general &
administrative expenses and research & development expense.
Research and development expense has the largest percentage decrease in expenses. Cost of
goods sold has the largest percentage increase in expenses.

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5-22 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to BE5-19
As a percent
of sales
(in millions) 2016 2015 2016 2015

Sales $63,762 $61,890 100% 100%

Cost of Goods Sold 33,092 30,096 51.9% 48.6%
Gross Profit 30,670 31,794 48.1% 51.4%
Selling, General & Administrative Expenses 15,335 15,897 24.1% 25.7%
Research & Development Expense 7,052 7,844 11.1% 12.7%
Interest Expense 145 142 0.2% 0.2%
Earnings Before Provision for Taxes 8,138 7,911 12.8% 12.8%
Provision for Taxes 2,848 2,769 4.5% 4.5%
Net Income $5,290 $5,142 8.3% 8.3%

The cost of goods sold is the largest line item as a percent of sales in 2016. From 2015 to 2016,
it increased from 48.6% to 51.9%.

Solution to BE5-20

All dollar amounts are in millions.

a. Current computation:
Net Income
Profit Margin =
Sales
($54 − $6)
0.075 =
Sales
Sales = $640
New Computation:
$54
Profit Margin =
$640
Profit Margin = 0.084 or 8.4%
b. Computation:
Net Income
Return on Assets =
Average Total Assets
$54
Return on Assets =
$490
Return on Assets = 0.11or 11%

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-23

Exercises
Solution to E5-1
a. Single-Step Income Statement
Tamer Tire Company
Income Statement
For the Year Ended December 31
Revenues and Gains
Sales $320,000
Interest income 12,000
Dividend Income 8,000
Gain on Disposal of Plant Assets 3,400
Gain on Flood Damage 32,000
Unrealized Gain on Trading Investments 46,000
Total Revenues and Gains $421,400

Expenses and Losses

Cost of Goods Sold $64,000
Selling Expenses 36,000
Sales Salaries Expense 7,000
Advertising Expense 10,000
Depreciation Expense 18,000
Amortization Expense 11,000
Office Salaries Expense 14,000
Office Supplies Expense 5,000
Loss on Asset Impairment 12,500
Systems Consulting Fees 2,000
Accounting and Legal Fees 3,500
Interest Expense 4,500
Income Tax Expense at 40%* 93,560
Total Expenses and Losses (281,060)

Income from Continuing Operations $140,340

Discontinued Operations:
Loss on Discontinued Operations-net of tax of
$8000 ($20,000 x [1 - .40]) (12,000)

Net Income $128,340

*Tax Expense = 40% x (Revenues – Expenses before tax) = $421,400 – $187,500 = $233,900 x 40% = $93,560.

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5-24 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

b. Multiple-Step Income Statement

Tamer Tire Company
Income Statement
For the Year Ended December 31
Sales $320,000
Less: Cost of Goods Sold (64,000)
Gross Profit $256,000

Operating Expenses:
Selling Expenses
Selling Expenses $36,000
Sales Salaries Expense 7,000
Advertising Expense 10,000 (53,000)
General and Administrative Expenses
Depreciation Expense 18,000
Amortization Expense 11,000
Office Salaries Expense 14,000
Office Supplies Expense 5,000
Systems Consulting Fees 2,000
Accounting and Legal Fees 3,500 (53,500)
Operating Income $149,500

Other Revenues and Gains

Gain on Disposal of Plant Assets $3,400
Gain on Flood Damage 32,000
Unrealized Gain on Trading Investments 46,000
Dividend Income 8,000
Interest Income 12,000 101,400

Other Expenses and Losses

Loss on Asset Impairment (12,500)
Interest Expense (4,500) (17,000)

Income from Continuing Operations Before Tax $233,900

Income Tax Expense at 40% (93,560)
Income from Continuing Operations $140,340
Discontinued Operations:
Loss on Discontinued Operations-net of tax of
$8,000 ($20,000 x [1 - .40]) (12,000)

Net Income $128,340

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-25

Solution to E5-2
Tamer Tire Company
Income Statement
For the Year Ended December 31

Sales $320,000
Less: Cost of Goods Sold (64,000)
Gross Profit $256,000

Operating Expenses:
Selling Expenses $53,000
General and Administrative Expenses 53,500
Total Operating Expenses (106,500)

Operating Income $149,500

Other Revenues/Gains and Expenses/Losses 84,400

Income from Continuing Operations Before Tax $233,900

Income Tax Expense (93,560)

Income from Continuing Operations $140,340

Discontinued Operations:
Loss on Discontinued Operations-net of tax of
$8,000 ($20,000 x [1 - .40]) (12,000)

Net Income $128,340

© 2016 Pearson Education, Inc.

5-26 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Footnote (Supporting Schedules) for Condensed Income Statement

Selling Expenses
Selling Expenses $36,000
Sales Salaries Expense 7,000
Advertising Expense 10,000
Total Selling Expenses $53,000
General and Administrative Expenses
Depreciation Expense $18,000
Amortization Expense 11,000
Office Salaries Expense 14,000
Office Supplies Expense 5,000
Systems Consulting Fees 2,000
Accounting and Legal Fees 3,500
Total General and Administrative Expenses $53,500
Other Revenues/Gains and Expenses/Losses
Gain on Disposal of Plant Assets $3,400
Gain on Flood Damage 32,000
Unrealized Gain on Trading Investments 46,000
Loss on Asset Impairment (12,500)
Dividend Income 8,000
Interest Income 12,000
Interest Expense (4,500)
Total Other Revenues/Gains and
Expenses/Losses $84,400

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-27

Solution to E5-3
a. Condensed Income Statement
Bradley Corporation
Income Statement (Condensed Format)
For the Year Ended December 31
Sales $1,245,890
Less: Cost of Goods Sold (65,000)
Gross Profit $1,180,890

Operating Expenses:
Selling Expenses $187,000
General and Administrative Expenses 200,150
Total Operating Expenses (387,150)

Operating Income $793,740

Other Revenues/Gains and Expenses/Losses (13,400)

Income from Continuing Operations Before Tax $780,340

Income Tax Expense at 40% (312,136)

Income from Continuing Operations $468,204

Discontinued Operations:
Gain on Discontinued Operations-net of tax of
$12,000
($30,000 x [1 - .40]) 18,000

Net Income $486,204

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5-28 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

b. Footnote (Supporting Schedules) for Condensed Income Statement

Selling Expenses
Selling Expenses $75,000
Sales Salaries Expense 32,500
Advertising Expense 79,500
Total Selling Expenses $187,000
General and Administrative Expenses
Depreciation Expense $89,750
Amortization Expense 12,000
Office Salaries Expense 23,500
Office Supplies Expense 21,500
Systems Consulting Fees 18,900
Accounting and Legal Fees 34,500
Total General and Administrative Expenses $200,150
Other Revenues/Gains and Expenses/Losses
Gain on Disposal of Plant Assets $16,700
Gain on Flood Damage 18,700
Unrealized Gain on Trading Securities 12,000
Loss on Asset Impairment (58,900)
Dividend Income 5,400
Interest Income 6,700
Interest Expense (14,000)
Total Other Revenues/Gains and
Expenses/Losses ($13,400)

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-29

Solution to E5-4
Bradley Corporation
Income Statement (Single-step format)
For the Year Ended December 31
Revenues and Gains
Sales $1,245,890
Interest Income 6,700
Dividend Income 5,400
Gain on Disposal of Plant Assets 16,700
Gain on Flood Damage 18,700
Unrealized Gain on Trading Securities 12,000
Total Revenues and Gains $1,305,390

Expenses and Losses

Cost of Goods Sold $65,000
Selling Expenses 75,000
Sales Salaries Expense 32,500
Advertising Expense 79,500
Depreciation Expense 89,750
Amortization Expense 12,000
Office Salaries Expense 23,500
Office Supplies Expense 21,500
Loss on Asset Impairment 58,900
Systems Consulting Fees 18,900
Accounting and Legal Fees 34,500
Interest Expense 14,000
Income Tax Expense at 40%* 312,136
Total Expenses and Losses (837,186)

Income from Continuing Operations $468,204

Discontinued Operations:
Gain on Discontinued Operations-net of tax of
$12,000
($30,000 x [1 - .40]) 18,000

Net Income $486,204

*40% x ($1,305,390 – $525,050) = 40% x $780,340 = $312,136.

© 2016 Pearson Education, Inc.

5-30 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Bradley Corporation
Income Statement (Multiple-step format)
For the Year Ended December 31
Sales $1,245,890
Less: Cost of Goods Sold (65,000)
Gross Profit $1,180,890

Operating Expenses:
Selling Expenses
Selling Expenses $75,000
Sales Salaries Expense 32,500
Advertising Expense 79,500 (187,000)
General and Administrative Expenses
Depreciation Expense $89,750
Amortization Expense 12,000
Office Salaries Expense 23,500
Office Supplies Expense 21,500
Systems Consulting Fees 18,900
Accounting and Legal Fees 34,500 (200,150)

Operating Income $793,740

Other Revenues and Gains

Gain on Disposal of Plant Assets $16,700
Gain on Flood Damage 18,700
Unrealized Gain on Trading Securities 12,000
Dividend Income 5,400
Interest Income 6,700 59,500

Other Expenses and Losses

Loss on Asset Impairment (58,900)
Interest Expense (14,000) (72,900)

Income from Continuing Operations Before Tax $780,340

Income Tax Expense at 40% (312,136)

Income from Continuing Operations $468,204

Discontinued Operations:
Gain on Discontinued Operations-net of tax of
$12,000 ($30,000 x [1 - .40]) $18,000
Net Income $486,204

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-31

Solution E5-5
Boley Boxes, Inc.
Income Statement
For the Year Ended December 31
Sales $875,650
Less: Cost of Goods Sold (45,000)
Gross Profit $830,650
Operating Expenses:
Selling Expenses
Selling Expenses $32,560
Sales Salaries Expense 14,567
Advertising Expense 16,400 ($63,527)
General and Administrative Expenses
Depreciation Expense 2,500
Amortization Expense 1,680
Office Salaries Expense 19,400
Office Supplies Expense 23,000
Legal Fees 2,150
Accounting Fees 4,300 (53,030)
Operating Income $714,093

Other Revenues and Gains

Gain on Sale of Investment Securities $4,300
Unrealized Gain on Trading Securities 6,000
Dividend Income 780
Interest Income 325 11,405

Other Expenses and Losses

Loss on Asset Impairment (3,450)
Interest Expense (5,000) (8,450)

Income from Continuing Operations Before Tax $717,048

Income Tax Expense at 40% (286,819)

Income from Continuing Operations $430,229

Discontinued Operations:
Gain on Discontinued Operations-net of tax of
$1,800 2,700
Net Income $432,929

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5-32 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution E5-6
Boley Boxes, Inc.
Income Statement
For the Year Ended December 31
Sales $875,650
Less: Cost of Goods Sold (45,000)
Gross Profit $830,650

Operating Expenses:
Selling Expenses $63,527
General and Administrative Expenses 53,030
Total Operating Expenses (116,557)

Operating Income $714,093

Other Revenues/Gains and Expenses/Losses 2,955

Income from Continuing Operations Before Tax $717,048

Income Tax Expense at 40% (286,819)

Income from Continuing Operations $430,229

Discontinued Operations:
Gain on Discontinued Operations-net of tax 2,700

Net Income $432,929

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-33

Footnote (Supporting Schedules)

Condensed Income Statement
For the Year Ended December 31
Selling Expenses
Selling Expenses $32,560
Sales Salaries Expense 14,567
Advertising Expense 16,400
Total Selling Expenses $63,527
General and Administrative Expenses
Depreciation Expense $2,500
Amortization Expense 1,680
Office Salaries Expense 19,400
Office Supplies Expense 23,000
Legal Fees 2,150
Accounting Fees 4,300
Total General and Administrative Expenses $53,030
Other Revenues/Gains and Expenses/Losses
Gain on Sale of Investment Securities $4,300
Unrealized Gain on Trading Securities 6,000
Loss on Asset Impairment (3,450)
Dividend Income 780
Interest Income 325
Interest Expense (5,000)
Total Other Revenues/Gains and
Expenses/Losses $2,955

© 2016 Pearson Education, Inc.

5-34 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to E5-7

Multiple-Step Income Statement

Ciara’s Cookie Company
Income Statement
For the Current Year Ended
Sales $1,200,895
Less: Cost of Goods Sold (450,000)
Gross Profit $750,895
Operating Expenses:
Selling Expenses
Selling Expenses $37,450
Sales Salaries Expense 23,500
Advertising Expense 21,500 (82,450)
General and Administrative Expenses
Depreciation Expense $25,500
Amortization Expense 12,000
Office Salaries Expense 65,000
Office Supplies Expense 54,800
Legal Fees 8,000
Accounting Fees 10,425 (175,725)
Operating Income $492,720

Other Revenues and Gains

Gain on Disposal of Plant Assets $76,000
Unrealized Gain on Trading Securities 27,250
Dividend Income 3,250
Interest Income 3,400 109,900

Other Expenses and Losses

Loss on Asset Impairment $(9,050)
Interest Expense (6,700) (15,750)
Income from Continuing Operations Before Tax $586,870
Income Tax Expense at 40% (234,748)
Income from Continuing Operations $352,122
Discontinued Operations:
Gain on Discontinued Operations-net of tax of
$22,712 ($56,780 x [1 - .40]) 34,068
Net Income $386,190

Solution E5-8

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-35

Elegant Homes Corporation

Statement of Net Income
For the Year Ended December 31, 2017

Elegant Homes Corporation after the Discontinued Operation 2017

Sales 400
Cost of Goods Sold (96)
Gross Profit $304
Selling Expenses (64)
General and Administrative Expenses (52)
Operating Profit 188
Other Revenues and Expenses (40)
Other Expenses and Losses:
Loss on Asset Impairment (38)
Income from Continuing Operations Before Tax $110
Income Tax Expense (at 40%) (44)
Income from Continuing Operations $66
Discontinued Operations:

Loss on Sale of Mobile Homes Division, net of tax of $52 (78)

Operating Income of Discontinued Operation, net of tax of $19 28
Net Income $16

© 2016 Pearson Education, Inc.

5-36 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to E5-9
Dane Products, Incorporated
Statement of Stockholders’ Equity
For the Year Ended December 31
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders’
(no par stock) Earnings Income Equity
Beginning Balance, January 1 $234,500 $520,000 $(55,675) $698,825
New issue of common stock-no
par 25,000 25,000
Net Income 89,500 89,500
Dividends Declared (15,000) (15,000)
Other Comprehensive Income:
Unrealized Gain on Available-
for-Sale Securities, net of tax ________ ________ 11,000 11,000
Ending Balance, December 31 $259,500 $594,500 $(44,675) $809,325

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-37

Solution to E5-10

Components on Net Income from the Unadjusted Trial Balance

Account Debit Credit
Sales $1,200,895
Interest Income 3,400
Dividend Income 3,250
Gain on Sale of Property 6,789
Gain on Disposal of Plant Assets 76,000
Unrealized Gain on Trading Investments 27,250
Gain on Sale of Discontinued Operations Before Tax 56,780
Cost of Goods Sold $450,000
Selling Expenses 37,450
Office Supplies Expense 54,800
Amortization Expense 12,000
Sales Salaries Expense 23,500
Advertising Expense 21,500
Office Salaries Expense 65,000
Depreciation Expense 25,500
Legal Fees 8,000
Accounting Fees 10,425
Interest Expense 6,700
Loss on Asset Impairment 9,050
Total $723,925 $1,374,364

Net Income Computation:

Total Revenues and Income (total credits) $1,374,364
Total Expenses and Losses (total debits) 723,925
Income before taxes 650,439
Tax expense at 40% 260,176
Net Income $390,263

© 2016 Pearson Education, Inc.

5-38 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Statement of Stockholders’ Equity

Ciara’s Cookie Company
Statement of Stockholders’ Equity
For the Current Year Ended
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders’
(no par stock) Earnings Income Equity
Beginning Balance, Jan. 1 $456,000 $1,200,950 ($55,675) $1,601,275
New issue of common
stock-no par 25,000 25,000
Net Income 390,263 390,263
Dividends Declared (57,000) (57,000)
Other Comprehensive
Income: Unrealized Gain on
Available-for-Sale Securities,
net of tax ($3,500 x [1 - .40])
2,100 2,100
______ _______
Ending Balance, Dec. 31 $481,000 $1,534,213 ($53,575) $1,961,638

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-39

Solution to E5-11

Statement of Stockholders’ Equity

Components on Net Income from the Unadjusted Trial Balance

Account Debit Credit
Sales 2,200,000
Interest Income 34,500
Dividend Income 12,300
Gain on Disposal of Plant Assets 100,500
Unrealized Gain on Trading Investments 86,000
Gain due to Flood Damage before Tax 109,000
Cost of Goods Sold 750,000
Selling Expenses 20,000
Office Supplies Expense 123,500
Amortization Expense 34,500
Sales Salaries Expense 55,000
Advertising Expense 68,900
Office Salaries Expense 78,500
Depreciation Expense 68,000
Accounting and Legal Fees 10,425
Systems Consulting Fees 44,550
Interest Expense 23,750
Loss on Asset Impairment 12,350
Loss on Sale of Discontinued Operations Before Tax 90,000
Total 1,379,475 2,542,300

Net Income Computation:

Total Revenues and Income (total credits) $2,542,300
Total Expenses and Losses (total debits) 1,379,475
Income before taxes 1,162,825
Tax expense at 40% 465,130
Net Income $697,695

© 2016 Pearson Education, Inc.

5-40 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Bluebird Products, Inc.

Statement of Stockholders’ Equity
For the Year Ended December 31
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders’
(no par stock) Earnings Income Equity
Beginning Balance, Jan. 1 $1,456,000 $3,200,950 $95,675 $4,752,625
New issue of common stock-no
par 345,000 345,000
Net Income 697,695 697,695
Dividends Declared (76,500) (76,500)
Other Comprehensive Income:
Unrealized Gain on Available-
for-Sale Securities, net of tax
($45,600 x [1 - .40])
_______ ________ 27,360 27,360
Ending Balance, Dec. 31 $1,801,000 $3,822,145 $123,035 $5,746,180

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-41

Solution to E5-12
Net Income
Profit Margin =
Sales

2016 2015
Net Income $5,290 $5,142
Sales $63,762 61,890
Profit Margin 8.3% 8.3%

Net Income
Return on Assets =
Average Total Assets
Denominator:
Beginning Total Assets + Ending Total Assets
Average Total Assets =
2

2016 2015
Net Income $5,290 $5,142
Average Total Assets $160,878 $158,291
Return on Total Assets 3.29% 3.25%

Average Total Assets:

Beginning Total Assets $159,047 $157,534
Ending Total Assets 162,708 159,047
Subtotal 321,755 316,581
Divide by 2 2
Average Total Assets $160,878 $158,291

A profit margin around 8% is reasonable. A return on assets around 3% is not that much higher
than what could be earned on a risk-free investment. Thus, overall Dragonfly is not highly
profitable. Both the profit margin and return on assets are similar from 2015 to 2016, indicating
that Dragonfly’s profitability has remained constant.

© 2016 Pearson Education, Inc.

5-42 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Problems
Solution to P5-1
a. Single-step income statement
Bluebird Products, Inc.
Income Statement
For the Year Ended December 31
Revenues and Gains
Sales $2,200,000
Interest Income 34,500
Dividend Income 12,300
Gain on Disposal of Plant Assets 100,500
Unrealized Gain on Trading Securities 86,000
Total Revenues and Gains $2,433,300

Expenses and Losses

Cost of Goods Sold $750,000
Selling Expenses 20,000
Sales Salaries Expense 55,000
Advertising Expense 68,900
Depreciation Expense 68,000
Amortization Expense 34,500
Office Salaries Expense 78,500
Office Supplies Expense 123,500
Loss on Asset Impairment 12,350
Systems Consulting Fees 44,550
Accounting and Legal Fees 10,425
Interest Expense 23,750
Income Tax Expense at 40%* 457,530
Total Expenses and Losses (1,747,005)
Income from Continuing Operations $686,295
Discontinued Operations:
Loss on Discontinued Operations-net of tax of
$36,000
($90,000 x [1 - .40]) (54,000)

Net Income $632,295

*40% x ($2,433,300 – $1,289,475) = 40% x $1,143,825 = $457,530.

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-43

b. Multiple-step income statement

Bluebird Products, Inc.
Income Statement
For the Year Ended December 31
Sales $2,200,000
Less: Cost of Goods Sold (750,000)
Gross Profit $1,450,000

Operating Expenses
Selling Expenses
Selling Expenses $20,000
Sales Salaries Expense 55,000
Advertising Expense 68,900 143,900

General and Administrative Expenses

Depreciation Expense 68,000
Amortization Expense 34,500
Office Salaries Expense 78,500
Office Supplies Expense 123,500
Systems Consulting Fees 44,550
Accounting and Legal Fees 10,425 359,475
Operating Income $946,625

Other Revenues and Gains

Gain on Disposal of Plant Assets $100,500
Unrealized Gain on Trading Securities 86,000
Dividend Income 12,300
Interest Income 34,500 233,300

Other Expenses and Losses

Loss on Asset Impairment $(12,350)
Interest Expense (23,750) (36,100)
Income from Continuing Operations Before Tax $1,143,825
Income Tax Expense at 40% (457,530)
Income from Continuing Operations $686,295
Discontinued Operations
Loss on Discontinued Operations-net of tax of $36,000
($90,000 x [1 - .40]) (54,000)

Net Income $632,295

© 2016 Pearson Education, Inc.

5-44 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-2
Condensed income statement
Bluebird Products, Inc.
Income Statement
For the Year Ended December 31
Sales $2,200,000
Less: Cost of Goods Sold (750,000)
Gross Profit $1,450,000

Operating Expenses:
Selling Expenses $143,900
General and Administrative Expenses 359,475
Total Operating Expenses (503,375)

Operating Income $946,625

Other Revenues/Gains and Expenses/Losses 197,200

Income from Continuing Operations Before Tax $1,143,825

Income Tax Expense at 40% (457,530)

Income from Continuing Operations $686,295

Discontinued Operations:
Loss on Discontinued Operations-net of tax of
$36,000
($90,000 x [1 - .40]) (54,000)

Net Income $632,295

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-45

Bluebird Products, Inc.

Footnote (Supporting Schedule)
Condensed Income Statement
For the Year Ended December 31
Selling Expenses
Selling Expenses $20,000
Sales Salaries Expense 55,000
Advertising Expense 68,900
Total Selling Expenses $143,900

General and Administrative Expenses

Depreciation Expense $68,000
Amortization Expense 34,500
Office Salaries Expense 78,500
Office Supplies Expense 123,500
Systems Consulting Fees 44,550
Accounting and Legal Fees 10,425
Total General and Administrative Expenses $359,475

Other Revenues/Gains and Expenses/Losses

Gain on Disposal of Plant Assets $100,500
Unrealized Gain on Trading Securities 86,000
Loss on Asset Impairment (12,350)
Dividend Income 12,300
Interest Income 34,500
Interest Expense (23,750)
Total Other Revenues/Gains and
Expenses/Losses $197,200

© 2016 Pearson Education, Inc.

5-46 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-3
a. Single-Step Income Statement
Right Angle Manufacturing Company
Income Statement
For the Year Ended December 31
Revenues and Gains
Sales $230,000
Interest Income 680
Dividend Income 200
Gain on Disposal of Plant Assets 1,000
Unrealized Gain on Trading Securities 4,000
Total Revenues and Gains $235,880

Expenses and Losses

Cost of Goods Sold $75,000
Selling Expenses 1,450
Sales Salaries Expense 145
Advertising Expense 3,400
Depreciation Expense 2,350
Amortization Expense 3,000
Office Salaries Expense 1,890
Office Supplies Expense 1,250
Loss on Asset Impairment 900
Systems Consulting Fees 670
Accounting and Legal Fees 575
Interest Expense 890
Income Tax Expense at 40%* 57,744
Total Expenses and Losses (149,264)

Income from Continuing Operations $86,616

Discontinued Operations
Loss on Discontinued Operations-net of tax of
$100 ($250 x [1 - .40]) (150)

Net Income $86,466

*40% x ($235,880 – $91,520) = 40% x $144,360 = $57,744

© 2016 Pearson Education, Inc.

 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-47

b. Multiple-Step Income Statement

Right Angle Manufacturing Company
Income Statement
For the Year Ended December 31
Sales $230,000
Less: Cost of Goods Sold (75,000)
Gross Profit $155,000

Operating Expenses:
Selling Expenses
Selling Expenses $1,450
Sales Salaries Expense 145
Advertising Expense 3,400 $(4,995)
General and Administrative Expenses
Depreciation Expense $2,350
Amortization Expense 3,000
Office Salaries Expense 1,890
Office Supplies Expense 1,250
Systems Consulting Fees 670
Accounting and Legal Fees 575 (9,735)

Operating Income $140,270

Other Revenues and Gains

Gain on Disposal of Plant Assets $1,000
Unrealized Gain on Trading Securities 4,000
Dividend Income 200
Interest Income 680 5,880

Other Expenses and Losses

Loss on Asset Impairment (900)
Interest Expense (890) (1,790)
Income from Continuing Operations Before Tax $144,360
Income Tax Expense at 40% (57,744)
Income from Continuing Operations $86,616
Discontinued Operations
Loss on Discontinued Operations-net of tax of
$100 ($250 x [1 - .40]) (150)

Net Income $86,466

c. Condensed Income Statement

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5-48 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Right Angle Manufacturing Company

Income Statement
For the Year Ended December 31
Sales $230,000
Less: Cost of Goods Sold (75,000)
Gross Profit $155,000

Operating Expenses:
Selling Expenses $4,995
General and Administrative Expenses 9,735
Total Operating Expenses (14,730)

Operating Income $140,270

Other Revenues/Gains and Expenses/Losses 4,090

Income from Continuing Operations Before Tax $144,360

Income Tax Expense at 40% (57,744)

Income from Continuing Operations $86,616

Discontinued Operations
Loss on Discontinued Operations-net of tax of
$100 (150)

Net Income $86,466

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-49

Right Angle Manufacturing Company

Footnote (Supporting Schedules) for Condensed Income Statement
For the Year Ended December 31
Selling Expenses
Selling Expenses $1,450
Sales Salaries Expense 145
Advertising Expense 3,400
Total Selling Expenses $4,995
General and Administrative Expenses
Depreciation Expense $2,350
Amortization Expense 3,000
Office Salaries Expense 1,890
Office Supplies Expense 1,250
Systems Consulting Fees 670
Accounting and Legal Fees 575
Total General and Administrative Expenses $9,735
Other Revenues/Gains and Expenses/Losses
Gain on Disposal of Plant Assets $1,000
Unrealized Gain on Trading Securities 4,000
Loss on Asset Impairment (900)
Dividend Income 200
Interest Income 680
Interest Expense (890)
Total Other Revenues/Gains and
Expenses/Losses $4,090

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5-50 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-4
The following statement of net income would meet IFRS presentation requirements.
Cardinal Manufacturing, Inc.
Statement of Profit and Loss
For the Current Year Ended
Sales $2,500,000 Required
Less: Cost of Goods Sold (980,000)
Gross Profit $1,520,000

Operating Expenses
Selling Expenses
Selling Expenses $20,000
Sales Salaries Expense 145,000
Advertising Expense 68,900 (233,900)
General and Administrative Expenses
Depreciation Expense $130,000
Office Salaries Expense 78,500
Office Supplies Expense 123,500
Systems Consulting Fees 44,550 (376,550)
Operating Profit $909,550

Finance Costs(Interest Expense) (98,750) Required

Interest Income 4,500
Income from Associates 75,000 Required
Other Revenues/Gains and Expenses/Losses
Gain on Disposal of Plant Assets $100,500
Loss on Asset Impairment (9,350)
Gain on Flood Damage 56,000
Total Other Revenues/Gains and
Expenses/Losses 147,150

Profit Before Tax $1,037,450

Income Tax Expense at 40% (414,980) Required
Profit from Continuing Operations $622,470
Discontinued Operations
Discontinued Operations, Loss Required
($140,000 x [1 - .40]) (84,000)

Net Profit $538,470 Required

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-51

Solution to P5-5
Income Statement Reported Net
Event Classification of Tax?
Loss on disposal of Non-operating No
equipment
Gain on sale of plant Non-operating No
assets
Impairment loss Non-operating No
Loss on inventory write- Non-operating No
off after government
prohibition
Operating income Operating No
Unrealized loss on Not included in net income Yes
available-for-sale (included in Other
investments Comprehensive Income)
Gain on disposal of Non-operating No
expropriated land
Unrealized gain on Non-operating No
trading securities
Operating income of Discontinued operations Yes
discontinued division
Loss on inventory write- Non-operating No
off due to obsolescence

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5-52 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-6

a. Single-Step Income Statement

Delaney Products, Inc.
Income Statement
For the Year Ended December 31
Revenues and Gains
Sales $400,000
Interest Income 4,000
Dividend Income 866
Gain on Disposal of Plant Assets 890
Unrealized Gain on Trading Securities 200
Total Revenues and Gains $405,956

Expenses and Losses

Cost of Goods Sold $25,000
Selling Expenses 5,000
Sales Salaries Expense 2,100
Advertising Expense 7,000
Depreciation Expense 8,250
Amortization Expense 5,500
Office Salaries Expense 6,700
Office Supplies Expense 2,000
Loss on Asset Impairment 467
Systems Consulting Fees 350
Accounting and Legal Fees 300
Interest Expense 900
Income Tax Expense at 40%* 136,956
Total Expenses and Losses (200,523)

Income from Continuing Operations $205,433

Discontinued Operations
Loss on Discontinued Operations-net of tax of
$400
($1,000 x [1 - .40]) (600)

Net Income $204,833

*40% x ($405,956 – $63,567) = 40% x $342,389 = $136,956.

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-53

Multiple-step Income Statement

Delaney Products, Inc.
Income Statement
For the Year Ended December 31
Sales $400,000
Less: Cost of Goods Sold (25,000)
Gross Profit $375,000

Operating Expenses:
Selling Expenses
Selling Expenses $5,000
Sales Salaries Expense 2,100
Advertising Expense 7,000 (14,100)
General and Administrative Expenses
Depreciation Expense 8,250
Amortization Expense 5,500
Office Salaries Expense 6,700
Office Supplies Expense 2,000
Systems Consulting Fees 350
Accounting and Legal Fees 300 (23,100)
Operating Income $337,800

Other Revenues and Gains

Gain on Disposal of Plant Assets $890
Unrealized Gain on Trading Securities 200
Dividend Income 866
Interest Income 4,000 $5,956

Other Expenses and Losses

Loss on Asset Impairment $(467)
Interest Expense (900) (1,367)

Income from Continuing Operations Before Tax $342,389

Income Tax Expense at 40% (136,956)
Income from Continuing Operations $205,433
Discontinued Operations
Loss on Discontinued Operations-net of tax of
$400 ($1,000 x [1 - .40]) (600)

Net Income $204,833

Condensed Income Statement

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5-54 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Delaney Products, Inc.

Income Statement
For the Year Ended December 31
Sales $400,000
Less: Cost of Goods Sold (25,000)
Gross Profit $375,000

Operating Expenses:
Selling Expenses $14,100
General and Administrative Expenses 23,100
Total Operating Expenses (37,200)

Operating Income $337,800

Other Revenues/Gains and Expenses/Losses 4,589

Income from Continuing Operations Before Tax $342,389

Income Tax Expense at 40% (136,956)

Income from Continuing Operations $205,433

Discontinued Operations
Loss on Discontinued Operations-net of tax of
$400 ($1,000 x [1 - .40]) (600)

Net Income $204,833

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-55

Delaney Products, Inc.

Footnote (Supporting Schedules) for Condensed Income Statement
For the Year Ended December 31
Selling Expenses
Selling Expenses $5,000
Sales Salaries Expense 2,100
Advertising Expense 7,000
Total Selling Expenses $14,100
General and Administrative Expenses
Depreciation Expense $8,250
Amortization Expense 5,500
Office Salaries Expense 6,700
Office Supplies Expense 2,000
Systems Consulting Fees 350
Accounting and Legal Fees 300
Total General and Administrative
Expenses $23,100
Other Revenues/Gains and Expenses/Losses
Gain on Disposal of Plant Assets $890
Unrealized Gain on Trading Securities 200
Loss on Asset Impairment (467)
Dividend Income 866
Interest Income 4,000
Interest Expense (900)
Total Other Revenues/Gains and
Expenses/Losses $4,589

b.
Delaney Products, Inc.
Statement of Comprehensive Income
For the Year Ended December 31
Net Income $204,833
Other Comprehensive Income: Unrealized Loss on Available-for-Sale Investments
($933 x [1 - .40]) (560)
Comprehensive Income $204,273

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 5-56 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-7
a.
Tortarella Timber Company
Statement of Comprehensive Income
For the Year Ended December 31
Operating Income ($345,000 – [15% x $345,000]) $293,250
Other Revenues/Gains and Expenses/Losses:
Unrealized Gain on Trading Portfolio 12,000
Loss on Sale of Investment in Bonds (23,500)
Income from Continuing Operations before Tax $281,750
Tax Expense at 30% (84,525)
Income from Continuing Operations $197,225
Discontinued Operations:
Operating Income from Retail Lumber Stores Division; net of tax of
$15,525 (15% x $345,000) x (1 - .30) $36,225
Loss on Disposal of Retail Lumber Stores Division; net of tax of
$5,055 ($16,850 x [1 - .30]) (11,795)
Gain from Discontinued Operations, net of tax $24,430
Net Income $221,655

Other Comprehensive Income:

Unrealized Loss on Available-for-Sale Investments ($5,600 x [1 - .30]) ($3,920)
Comprehensive Income $217,735

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-57

b.
Tortarella Timber Company
Income Statement
For the Year Ended December 31
Operating Income ($345,000 – [15% x $345,000]) $293,250
Other Revenues/Gains and Expenses/Losses:
Unrealized Gain on Trading Portfolio 12,000
Loss on Sale of Investment in Bonds (23,500)
Income from Continuing Operations Before Tax $281,750

Tax Expense at 30% (84,525)

Income from Continuing Operations $197,225

Discontinued Operations:
Operating Income from Retail Lumber Stores Division; net of tax of
$15,525 (15% x $345,000) x (1 - .30)
$36,225
Loss on Disposal of Retail Lumber Stores Division; net of tax of
$5,055 ($16,850 x [1 - .30]) (11,795)
Gain from Discontinued Operations, net of tax $24,430
Net Income $221,655

Tortarella Timber Company

Statement of Comprehensive Income
For the Year Ended December 31
Net Income $221,655

Other Comprehensive Income:

Unrealized Loss on Available-for-Sale Investments ($5,600 x [1 - .30]) ($3,920)
Comprehensive Income $217,735

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 5-58 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-8
a.
Right Angle Manufacturing Company
Statement of Stockholders’ Equity
For the Year Ended December 31

Accumulated
Other
Common Retained Compre- Total
Stock Earnings hensive Stockholders’
(no par stock) Income Treasury Stock Equity
Beginning Balance, Jan. 1 $75,000 $95,000 ($3,400) $166,600
New issue of common
stock-no par 20,000 20,000
Repurchase of shares (15,000) (15,000)
Net Income 86,466 86,466
Dividends Declared (500) (500)
Other Comprehensive
Income: Unrealized Gain
(Loss) on Available-for- Sale
Securities, net of tax of (468)
$312
($780 x [1 - .40]) _____ ______ ______ (468)

Ending Balance, Dec. 31 $95,000 $180,966 ($3,868) ($15,000) $257,098

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-59

b. Stockholders’ Equity section of the balance sheet

Right Angle Manufacturing Company
Partial Balance Sheet
At December 31
Stockholders’ Equity
Common Stock-no par $95,000
Retained Earnings 180,966
Accumulated Other Comprehensive Income (3,868)
Less: Treasury Stock (15,000)
Total Stockholders’ Equity $257,098

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5-60 SOLUTIONS MANUAL FOR INTERMEDIATE ACCOUNTING

Solution to P5-9
a. The common-size income statements are presented below.

As a percent of sales
Golden
Golden Fence Stone Wall Fence Stone Wall
(amounts in millions) Company Corporation Company Corporation

Sales $987,236 $67,450 100.0% 100.0%

Cost of Goods Sold 678,626 43,370 68.7% 64.3%
Gross Profit 308,610 24,080 31.3% 35.7%
Selling, General & Administrative Expenses 58,636 2,408 5.9% 3.6%
Other Operating Expenses 12,344 722 1.3% 1.1%
Interest Expense 24,689 193 2.5% 0.3%
Earnings Before Provision for Taxes 212,941 20,757 21.6% 30.8%
Provision for Taxes 74,529 7,265 7.5% 10.8%
Net Income $138,412 $13,492 14.0% 20.0%

In comparing the common-size income statements, we observe the following:

Golden Fence’s cost of goods sold, selling, general & administrative expenses, other
operating expenses, and interest expense are all a higher proportion of sales than the
same ratios for Stone Wall Corporation.
Stone Wall’s net income is a higher proportion of sales than Golden Fence Company. This
ratio of net income to sales is the profit margin.

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 CHAPTER 5 STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME 5-61

b. Stone Wall’s profit margin is higher, indicating it is able to return more of each dollar of
sales made to the shareholders or reinvest in the company. Stone Wall’s return on assets is
higher, indicating it is using its resources more efficiently. However, Golden Fence’s return
on stockholders’ equity is higher implying it is using its financing structure to provide a
greater return. Overall, both companies appear profitable, with Stone Wall performing
better in 2 of the 3 profitability measures.

Golden Fence Stone Wall

Company Corporation
Profit Margin (from a.) 14.0% 20.0%

Computation of Return on Assets:

Net income $138,412 $13,492
Average Total Assets $1,258,287 $102,211

Return on Assets 11.0% 13.2%

Computation of Return on Stockholders’ Equity:

Net income $138,412 $13,492

Average Stockholders’ Equity $654,309 $74,614

Return on Stockholders’ Equity 21.2% 18.1%

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