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ACC421 WEEK 3 E4-6 E4-16 P4-3 E18-4 E18-5 P18-7

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Resource: Intermediate Accounting
Write responses to Exercises E4-6 & E4-16; and Problem P4-3 in Ch. 4 and Exercises E18-4 & E18-5, and Problem P18-7 in Ch. 18 of Intermediate Accounting

E4-6 (Multiple-step and Single-step) The accountant of Whitney Houston Shoe Co. has compiled the
following information from the company’s records as a basis for an income statement for the year ended
December 31, 2007.
Rental revenue $ 29,000
Interest on notes payable 18,000
Market appreciation on land above cost 31,000
Wages and salaries—sales 114,800
Materials and supplies—sales 17,600
Income tax 37,400
Wages and salaries—administrative 135,900
Other administrative expenses 51,700
Cost of goods sold 496,000
Net sales 980,000
Depreciation on plant assets (70% selling, 30% administrative) 65,000
Cash dividends declared 16,000
There were 20,000 shares of common stock outstanding during the yea

E4-16 (Various Reporting Formats) The following information was taken from the records of Roland
Carlson Inc. for the year 2007. Income tax applicable to income from continuing operations $187,000;
income tax applicable to loss on discontinued operations $25,500; income tax applicable to extraordinary
gain $32,300; income tax applicable to extraordinary loss $20,400; and unrealized holding gain on
available-for-sale securities $15,000.
Extraordinary gain $ 95,000 Cash dividends declared $ 150,000
Loss on discontinued operations 75,000 Retained earnings January 1, 2007 600,000
Administrative expenses 240,000 Cost of goods sold 850,000
Rent revenue 40,000 Selling expenses 300,000
Extraordinary loss 60,000 Sales 1,900,000
Shares outstanding during 2007 were 100,000.
(a) Prepare a single-step income statement for 2007.
(b) Prepare a retained earnings statement for 2007.
(c) Show how comprehensive income is reported using the second income statement format.

P4-3 (Irregular Items) Tony Rich Inc. reported income from continuing operations before taxes during
2007 of $790,000. Additional transactions occurring in 2007 but not considered in the $790,000 are as
1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $80,000 during
the year. The tax rate on this item is 46%.
2. At the beginning of 2005, the corporation purchased a machine for $54,000 (salvage value of $9,000)
that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2005, 2006, and
2007 but failed to deduct the salvage value in computing the depreciation base.
3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax).
4. When its president died, the corporation realized $110,000 from an insurance policy. The cash surrender
value of this policy had been carried on the books as an investment in the amount of $46,000
(the gain is nontaxable).
5. The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that
this transaction meets the criteria for discontinued operations.
6. The corporation decided to change its method of inventory pricing from average cost to the FIFO
method. The effect of this change on prior years is to increase 2005 income by $60,000 and decrease
2006 income by $20,000 before taxes. The FIFO method has been used for 2007. The tax rate on
these items is 40%.
158 • Chapter 4 Income Statement and Related Information
(L0 4,
5, 6)
Prepare an income statement for the year 2007 starting with income from continuing operations before taxes.
Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding
for the year are 80,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

E18-4 (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a construction
job with a contract price of $1,500,000. The job was completed in 2009. The following information
is available.
2007 2008 2009
Costs incurred to date $400,000 $935,000 $1,070,000
Estimated costs to complete 600,000 165,000 –0–
Billings to date 300,000 900,000 1,500,000
Collections to date 270,000 810,000 1,425,000
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-ofcompletion
method is used.
(b) Prepare all necessary journal entries for 2008.
(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract
method is used.

E18-5 (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Beth Botsford uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing
the contract. The financial statement presentations relating to this contract at December 31, 2007, follow.
Balance Sheet
Accounts receivable—construction contract billings $21,500
Construction in progress $65,000
Less: Contract billings 61,500
Cost of uncompleted contract in excess of billings 3,500
Income Statement
Income (before tax) on the contract recognized in 2007 $18,200
(a) How much cash was collected in 2007 on this contract?
(b) What was the initial estimated total income before tax on this contract

P18-7 (Long-Term Contract with an Overall Loss) On July 1, 2007, Kyung-wook Construction Company
Inc. contracted to build an office building for Mingxia Corp. for a total contract price of $1,950,000.
On July 1, Kyung-wook estimated that it would take between 2 and 3 years to complete the building. On
December 31, 2009, the building was deemed substantially completed. Following are accumulated contract
costs incurred, estimated costs to complete the contract, and accumulated billings to Mingxia for
2007, 2008, and 2009.
At At At
12/31/07 12/31/08 12/31/09
Contract costs incurred to date $ 150,000 $1,200,000 $2,100,000
Estimated costs to complete the contract 1,350,000 800,000 –0–
Billings to Mingxia 300,000 1,100,000 1,850,000
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to
be recognized as a result of this contract for the years ended December 31, 2007, 2008, and 2009.
(Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be
recognized as a result of this contract for the years ended December 2007, 2008, and 2009. (Ignore
income taxes.)

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