Rembrandt Paint Company had the following income statement items for the year ended December 31, 2011 ($ in 000s)

P4-6 Income statement presentation

Rembrandt Paint Company had the following income statement items for the year ended December 31, 2011 ($ in 000s):

In addition, during the year the company completed the disposal of its plastics business and incurred a loss from operations of $1.6 million and a gain on disposal of the component's assets of $2 million. 500,000 shares of common stock were outstanding throughout 2011. Income tax expense has not yet been accrued. The income tax rate is 30% on all items of income (loss).

Required:
Prepare a multiple-step income statement for 2011, including EPS disclosures.


Click here for the solution: Rembrandt Paint Company had the following income statement items for the year ended December 31, 2011

P4-3 For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes

P4-3 Income statement presentation

For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes of $1,200,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material.

1. During 2011, one of Micron's factories was damaged in an earthquake. As a result, the firm recognized a loss of $800,000. The event is considered unusual and infrequent.
2. In November of 2011, Micron sold its Waffle House restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May of 2011. The operating income of the chain from January 1, 2011, through November was $160,000 and the loss on sale of the chain's assets was $300,000.
3. In 2011, Micron sold one of its six factories for $1,200,000. At the time of the sale, the factory had a carrying value of $1,100,000. The factory was not considered a component of the entity.
4. In 2009, Micron's accountant omitted the annual adjustment for patent amortization expense of $120,000. The error was not discovered until December 2011.

Required:
1. Prepare Micron's income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2011. Assume an income tax rate of 30%. Ignore EPS disclosures.
2. Briefly explain the motivation for segregating certain income statement events from income from continuing operations.


Click here for the solution: P4-3 For the year ending December 31, 2011, Micron Corporation had income from continuing operations before taxes

Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

Auditing P 5-27 Sarah Robertson, CPA had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2008, Herb Majestic told her that he needed a large bank loan to "tide him over" until sales picked up as expected late 2009. In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will "be his solution"-he was sure he will get it as long as the financial statements don't look too bad. Robertson stated that she believed the statements will have to include a going concern explanatory paragraph, Majestic said that this wasn't needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan. Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2009. The bank sued Sarah Robertson for fraud. Required: Indicate whether or not you think the bank will succeed. Support your answer.


Click here for the solution: Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

Last year, Douthett Inc. had sales of $2,400,000, based on a unit selling price of $600

PR21-4A Last year, Douthett Inc. had sales of $2,400,000, based on a unit selling price of $600. The variable cost per unit is $440, and fixed costs were $544,000. The maximum sales within Douthett's relevant range are 5,000 units. Douthett is considering a proposal to spend an additional $80,000 on billboard advertising during the current year in an attempt to increase sales and utilize and unused capacity.

INSTRUCTIONS:
1. Construct a cost volume profit chart indicating the break-even sales for last year. Verify your answer, using the break-even equation.
2. Using the cost volume profit chart prepared in part (1) determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. Verify your answers arithmetically.
3. Construct a cost volume profit chart indicating the break even sales for the current year, assuming that a noncancelable contract is signed price or other costs. Verify your answer, using the break-even equation.
4. Using the cost volume profit chart prepared in part (3), determine (a)the income from operations if sales total 4,00 units and (b) the maximum income from operations that could be realized during the year. Verify your answers arithmetically.


Click here for the solution: Last year, Douthett Inc. had sales of $2,400,000, based on a unit selling price of $600

On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares

P 19-13

(Note: This is a variation of the previous problem, modified to include stock options.)

On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred shareholders, respectively, on December 15, 2011.

On February 28, 2011, Dow sold 60,000 common shares. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2011, was $2,100,000. The income tax rate is 40%.

As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows:

The market price of the common stock averaged $32 per share during 2011.

Required:
Compute Dow's earnings per share for the year ended December 31, 2011.


Click here for the solution: On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares

Braddock Inc. had the following long-term receivable account balances at December 31, 2009

P7-10 (Comprehensive Receivables Problem) Braddock Inc. had the following long-term receivable account balances at December 31, 2009.

Note receivable from sale of division $1,500,000
Note receivable from officer 400,000

Transactions during 2010 and other information relating to Braddock's long-term receivables were as follows.

1. The $1,500,000 note receivable is dated May 1, 2009, bears interest at 9%, and represents the balance of the consideration received from the sale of Braddock's electronics division to New York Company. Principal payments of $500,000 plus appropriate interest are due on May 1, 2010, 2011, and 2012. The first principal and interest payment was made on May 1, 2010. Collection of the note installments is reasonably assured.

2. The $400,000 note receivable is dated December 31, 2009, bears interest at 8%, and is due on December 31, 2012. The note is due from Sean May, president of Braddock Inc. and is collateralized by 10,000 shares of Braddock's common stock. Interest is payable annually on December 31, and all interest payments were paid on their due dates through December 31, 2010. The quoted market price of Braddock's common stock was $45 per share on December 31, 2010.

3. On April 1, 2010, Braddock sold a patent to Pennsylvania Company in exchange for a $100,000 zero-interest-bearing note due on April 1, 2012. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2010, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor). The patent had a carrying value of $40,000 at January 1, 2010, and the amortization for the year ended December 31, 2010, would have been $8,000. The collection of the note receivable from Pennsylvania is reasonably assured.

4. On July 1, 2010, Braddock sold a parcel of land to Splinter Company for $200,000 under an installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2010, and signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and interest on the note will be $45,125 payable on July 1, 2011, through July 1, 2014. The land could have been sold at an established cash price of $200,000. The cost of the land to Braddock was $150,000. Circumstances are such that the collection of the installments on the note is reasonably assured.

Instructions
(a) Prepare the long-term receivables section of Braddock's balance sheet at December 31, 2010.
(b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that would appear in Braddock's balance sheet at December 31, 2010.
(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear on Braddock's income statement for the year ended December 31, 2010.

Click here for the solution: Braddock Inc. had the following long-term receivable account balances at December 31, 2009

During its first year of operations, Sitwell Corporation had the following transactions pertaining to its common stock

E15-1 (Recording The Issuance Of Common Stock) During its first year of operations, Sitwell Corporation had the following transactions pertaining to its common stock.

Jan. 10 Issued 80,000 shares for cash at $6 per share.
Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at $8 per share.
Sept. 1 Issued 60,000 shares for cash at $10 per share.

Instructions
(a) Prepare the journal entries for these transactions, assuming that the common stock has a par value of $3 per share.
(b) Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of $2 per share.

Click here for the solution: During its first year of operations, Sitwell Corporation had the following transactions pertaining to its common stock

During its first year of operations, Filippi’s Plumbing Supply Co. had net sales of $4,800,000

EX 9-15 Effect of doubtful accounts on net income

During its first year of operations, Filippi’s Plumbing Supply Co. had net sales of $4,800,000, wrote off $65,000 of accounts as uncollectible using the direct write-off method, and reported net income of $375,000. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1½% of net sales would be uncollectible.

Click here for the solution: During its first year of operations, Filippi’s Plumbing Supply Co. had net sales of $4,800,000

Using the data in Exercise 9-15, assume that during the second year of operations Filippi’s Plumbing Supply Co. had net sales of $5,500,000

EX 9-16 Effect of doubtful accounts on net income

Using the data in Exercise 9-15, assume that during the second year of operations Filippi’s Plumbing Supply Co. had net sales of $5,500,000, wrote off $70,000 of accounts as uncollectible using the direct write-off method, and reported net income of $450,000.

a. Determine what net income would have been in the second year if the allowance method (using 1½% of net sales) had been used in both the first and second years.

b. Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years.

Click here for the solution: Using the data in Exercise 9-15, assume that during the second year of operations Filippi’s Plumbing Supply Co. had net sales of $5,500,000

Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC)

Case 13-32 (Ethics and the Manager; Shut Down or Continue Operations) Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings, Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey. Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region's controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows:

AND SO ON

Required:
1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain.
2. Do you think Haley Romeros's decision to shut down the Clayton facility is ethical? Explain.
3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services?

Click here for the solution: Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC)

Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division

Case 11-22 (Ethics and the Manager; Rigging Standards) Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division. In looking over the past several years of quarterly income statements at the Home Security Division, she noticed that the first-quarter profits were always poor, the second-quarter profits were slightly better, the third-quarter profits were again slightly better, and the fourth quarter always ended with a spectacular performance in which the Home Security Division managed to meet or exceed its target profit for the year. She also was concerned to find letters from the company’s external auditors to top management warning about an unusual use of standard costs at the Home Security Division.

When Ms. Cummins ran across these letters, she asked the assistant controller, Gary barber, if he knew what was going on at the Home Security Division. Gary said that it was common knowledge in the company that the vice president in charge of the Home Security Division, Preston Lansing, had rigged the standards at his division in order to produce the same quarterly income pattern every year. According to the company policy, variances are taken directly to the income statement as an adjustment to cost of goods sold.

Favorable variances have the effect of increasing net operating income, and unfavorable variances have the effect of decreasing net operating income. Lansing had rigged the standards so that there were always large favorable variances. Company policy was a little vague about when these variances have to be reported on the divisional income statements. While the intent was clearly to recognize variances on the income statement in the period in which they arise, nothing in the company’s accounting manuals actually explicitly required this. So for many years Lansing had followed a practice of saving up the favorable variances and using them to create a nice smooth pattern of growing profits in the first three quarters, followed by a big “Christmas present” of an extremely good fourth quarter. (Financial reporting regulations forbid carrying variances forward from one year to the next on the annual audited financial statements, so all of the variances must appear on the divisional income statement by the end of the year.)

Ms. Cummins was concerned about these revalations and attempted to bring up the subject with the president of Merced Home Products, but was told that “we all know what Landing’s doing, but as long as he continues to turn in such good reports, don’t bother him.” When Ms. Cummins asked if the board of directors was aware of the situation, the president somewhat testily replied, “Of course they are aware.”

Required:
1. How did Preston Lansing probably “rig” the standard costs – are the standards set too high or too low? Explain.
2. Should Preston Lansing be permitted to continue his practice of managing reported profits?
3. What should Stacy Cummins do in this situation?

Click here for the solution: Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she had discovered about the standard costs at the Home Security Division

On January 1, 2010, Bailey Industries had stock outstanding as follows

E16-20 (EPS: Simple Capital Structure) On January 1, 2010, Bailey Industries had stock outstanding as follows.

6% Cumulative preferred stock $100 par value issued and outstanding 10,000 shares $1,000,000
Common stock, $10 par value, issued and outstanding 200,000 shares 2,000,000

To acquire the net assets of three smaller companies, Bailey authorized the issuance of an additional 170,000 common shares. The acquisitions took place as follows.

Date of Acquisition Shares Issued
Company A April 1, 2010 60,000
Company B July 1, 2010 80,000
Company C October 1, 2010 30,000

On May 14, 2010, Bailey realized a $90,000 (before taxes) insurance gain on the expropriation of investments originally purchased in 2000. On December 31, 2010, Bailey recorded net income of $300,000 before tax and exclusive of the gain.

Assuming a 40% tax rate, compute the earnings per share data that should appear on the financial statements of Bailey Industries as of December 31, 2010. Assume that the expropriation is extraordinary.

Click here for the solution: On January 1, 2010, Bailey Industries had stock outstanding as follows

Springsteen Co. had the following activity in its most recent year of operations

E23-1 (Classification of Transactions) Springsteen Co. had the following activity in its most recent year of operations.

(a) Pension expense exceeds amount funded. (e) Exchange of equipment for furniture.
(b) Redemption of bonds payable. (f) Issuance of capital stock.
(c) Sale of building at book value. (g) Amortization of intangible assets.
(d) Depreciation. (h) Purchase of treasury stock. (i) Issuance of bonds for land. (k) Increase in interest receivable on notes receivable. (j) Payment of dividends. (l) Purchase of equipment.

Instructions
Classify the items as (1) operating—add to net income; (2) operating—deduct from net income; (3) investing; (4) financing; or (5) significant noncash investing and financing activities. Use the indirect method.

Click here for the solution: Springsteen Co. had the following activity in its most recent year of operations