Concept explainers
Comprehensive: Income Statement and Retained Earnings Milwaukee Manufacturing Company presents the following partial list of account balances, after adjustments, as of December 31, 2019:
The following information is also available but is not reflected in the preceding accounts:
- a. The company sold Division E (a major component of the company) on August 2, 2019. During 2019, Division E had incurred a pretax loss from operations of $16,000. However, because the acquiring company could vertically integrate Division E into its facilities, Milwaukee Manufacturing was able to recognize a $42,000 pretax gain on the sale.
- b. On January 2, 2019, without warning, a foreign country expropriated a factory of Milwaukee Manufacturing which had been operating in that country. As a result of that expropriation, the company has incurred a pretax loss of $30,000.
- c. The common stock was outstanding for the entire year. A cash dividend of $1.20 per share was declared and paid in 2019.
- d. The 2019 income tax expense totals $31,050 and consists of the following:
Required:
- 1. As supporting documents for Requirement 2, prepare separate supporting schedules for selling expenses and for general and administrative expenses (include
depreciation expense where applicable in these schedules). - 2. Prepare а 2019 multiple-step income statement for Milwaukee Manufacturing.
- 3. Prepare a 2019 retained earnings statement.
- 4. Next Level What was Milwaukee Manufacturing’s return on common equity for 2019 if its average shareholders’ equity during 2019 was $500,000? What is your evaluation of this return on common equity if its “target” for 2019 was 15%?
- 5. Next Level Discuss how Milwaukee Manufacturing’s income statement in Requirement 2 might be different if it used IFRS.
1.
Prepare a separate schedule for both selling and general and administrative expenses of Company M for the year ended December 31, 2019.
Explanation of Solution
Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.
Prepare a separate schedule for both selling and general and administrative expenses of Company M for the year ended December 31, 2019 as follows:
Company M | |
For Year Ended December 31, 2019 | |
Schedule 1: Selling Expenses | |
Particulars | Amounts ($) |
Sales salaries expense | $27,400 |
Delivery expenses | 11,700 |
Sales personnel travel expenses | 8,300 |
Depreciation expense: sales equipment | 9,000 |
Advertising expense | 15,700 |
Total selling expenses | $72,100 |
Schedule 2: General and Administrative Expenses | |
Depreciation expense: buildings and office equipment | $14,400 |
Office and administrative salaries | 30,000 |
Property taxes and insurance expense | 9,000 |
Miscellaneous administrative expenses | 3,000 |
Total general and administrative expenses | $56,400 |
Table (1)
2.
Prepare a multi-step income statement of Company M for the year ended December 31, 2019.
Explanation of Solution
Multi-step income statement: The income statement represented in multi-steps with several subtotals, to report the income from principal operations, and separate the other expenses and revenues which affect net income, is referred to as multi-step income statement.
Prepare a multi-step income statement of Company M for the year ended December 31, 2019 as follows:
Company M | ||
Income Statement | ||
For Year Ended December 31, 2019 | ||
Particulars | Amounts ($) | Amounts ($) |
Sales | 463,200 | |
Less: Cost of goods sold | (232,200) | |
Gross profit | 231,000 | |
Less: Operating expenses: | ||
Selling expenses (Schedule 1) | 72,100 | |
General and administrative expenses (Schedule 2) | 56,400 | |
Total operating expenses | (128,500) | |
Operating income | 102,500 | |
Less: Other items: | ||
Interest revenue | 3,200 | |
Miscellaneous rent revenue | 5,900 | |
Loss from expropriation | (30,000) | |
Loss on sale of factory equipment | (4,100) | (25,000) |
Pretax income from continuing operations | 77,500 | |
Less: Income tax expense (1) | (23,250) | |
Income from continuing operations | 54,250 | |
Results from discontinued operations: | ||
Loss from operations of discontinued Division E (2) | (11,200) | |
Gain on sale of Division E (3) | 29,400 | 18,200 |
Net income (a) | 72,450 | |
Number of common shares (b) | 20,000 shares | |
Earnings per Common Share | $3.62 |
Table (2)
Working note (1):
Compute the amount of income tax expense:
Working note (2):
Compute the loss from operations of discontinued Division E:
Working note (3):
Compute the Gain on sale of Division E:
3.
Prepare a retained earnings statement of Company M for the year ended December 31, 2019.
Explanation of Solution
Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.
Prepare a retained earnings statement of Company M for the year ended December 31, 2019 as follows:
Statement of Retained Earnings | |
For Year Ended December 31, 2019 | |
Particulars | Amount ($) |
Retained earnings as on January 1,2019 | $200,800 |
Add: Net income | 72,450 |
273,250 | |
Less: Cash dividends (4) | (24,000) |
Retained earnings as on December 31, 2019 | $249,250 |
Table (3)
Working note (4):
Compute the amount of cash dividend:
4.
Ascertain the return on common equity of Company M for 2019 and comment.
Explanation of Solution
Return on equity (ROE): This financial ratio evaluates a company’s efficiency in using stockholders’ equity to generate net income. So, ROE is a tool used to measure the performance of a company.
Ascertain the return on common equity of Company M for 2019 as follows:
Working note (5):
Compute the average shareholder’s equity:
The return on shareholders’ equity of Company M for the year 2019 is 17.0%, which is above the target of 15%. However, Company M had results from discontinued operations in 2019. The target return falls short to 12.8%
5.
State the manner in which the income statement of Company M given in requirement 2 gets differs, if it uses IFRS.
Explanation of Solution
The presentation and the content of the income statement might differ as follows:
- Either the single-step or multiple-step format could have been used.
- The term “Turnover” could have been used instead of sales.
- The expenses might be classified by their nature rather than their function.
- To adjust the depreciation expense, if it has revalued its property.
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Chapter 5 Solutions
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