Chapter 5, Problem 20P

1.

To determine

Provide supporting schedules for cost of goods sold, selling expenses, general and administrative expenses, and depreciation expense.

Explanation of Solution

Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

Schedule of cost of goods sold is a report which reports cost of goods sold in a detailed manner.

Provide the schedule of cost of goods sold:

Company S
For the Year Ended December 31, 2016
Schedule 1: Cost of goods sold
Particulars	Amount	Amount
	($)	($)
Beginning inventory		$37,800
Add: Purchases	$173,000
Transportation in	$13,500
Cost of purchases	$186,500
Less: Purchase discount taken	($4,100)
Purchases returns and allowances	($6,200)
Net purchases		$176,200
Cost of goods available for sale		$214,000
Less: Ending inventory		($34,100)
Cost of goods sold		$179,900

Table (1)

Provide the schedule of selling expenses:

Company S
For the Year Ended December 31, 2016
Schedule 2: Selling Expenses
Particulars	Amount ($)	Amount ($)
Selling expenses:
Sales commission salaries	$18,200
Sales supplies used	$5,600
Delivery expense	$7,700
Promotion and advertising expense	$17,000
Total selling expenses		$48,500

Table (2)

Provide the schedule of general and administrative expenses:

Company S
For the Year Ended December 31, 2016
Schedule 3: General and Administrative Expenses
Particulars	Amount ($)	Amount ($)
General and Administrative Expenses:
Bad debt expense	$2,700
Office supplies expense	$1,400
Insurance and  property tax expense	$8,500
Office and administrative salaries expenses	$32,000
Total General and Administrative Expenses		$44,600

Table (3)

Provide the schedule of depreciation expenses:

Company S
For the Year Ended December 31, 2016
Schedule 4: Depreciation Expenses
Particulars	Amount ($)	Amount ($)
Depreciation Expenses:
Building and office equipment	$14,500
Sales equipment	$9,600
Total depreciation expense		$24,100

Table (4)

2.

To determine

Provide a multi-step income statement for the year 2016.

Explanation of Solution

Multi step income statement: A multiple step income statement refers to the income statement that shows the operating and non-operating activities of the business under separate head. In different steps of the multi-step income statement, principal operating activities are reported that starts from the record of sales revenue with all contra sales revenue account like sales returns, allowances and sales discounts.

Prepare a multi-step income statement for the year 2016.

Company S
Income Statement
For the Year Ended December 31, 2016
Particulars	Amount	Amount
	($)	($)
Sales	$328,600
Less: Sales discount taken	($4,900)
Net sales		$323,700
Less: Cost of goods sold		($179,900)
Gross profit		$143,800
Operating expenses:
Selling expenses	($48,500)
General and administrative expenses	($44,600)
Depreciation	($24,100)
Total operating expense		($117,200)
Operating income		$26,600
Other item:
Rent revenue	$6,900
Interest expense	($3,700)
Loss on sale of office equipment	($5,000)
Loss due to tornado	($12,000)
Pretax income from continuing operations		$12,800
Less: Income tax expense (1)		($3,840)
Income from continuing operation		$8,960
Result from discontinued operations:
Loss from operation of discontinued Division R (2)	($6,090)
Gain on sale of Division R (3)	$7,000
Income from discontinuing operation		$910
Net income		$9,870
Components of income	Earnings per common share
Income from continuing operation (5)	$1.12
Result from discontinuing operation (6)	$0.11
Net income		$1.23

Table (5)

Working note (1):

Calculate an amount of income taxes:

$\begin{array}{c}\text{Income taxes =}\left(\begin{array}{l}\text{ Income before taxes}\\ \times \text{Income tax rate}\end{array}\right)\\ =\left(\$12,000\times 30\%\right)\\ =\$3,840\end{array}$

Working note (2):

Calculate loss from operation of discontinuing Division R:

$\begin{array}{c}\begin{array}{l}\text{Loss from operation of }\\ \text{discontinuing Division R}\end{array}\}\text{=}\left(\begin{array}{l}\text{ Pretax operating loss}-\\ \text{30\% of Pretax operating loss}\end{array}\right)\\ =\left[\begin{array}{l}\$8,700-\\ \$2,610\left(\$8,700\times 30\%\right)\end{array}\right]\\ =-\$6,090\end{array}$

Working note (3):

Calculate gain on sale of Division R:

$\begin{array}{c}\text{Gain on sale of Division R =}\left(\begin{array}{l}\text{ Pretax gain}-\\ \text{30\% of Pretax gain}\end{array}\right)\\ =\left[\begin{array}{l}\$10,000-\\ \$3,00\left(\$10,000\times 30\%\right)\end{array}\right]\\ =\$7,000\end{array}$

Working note (4):

Calculate the number of common shares:

$\begin{array}{c}\text{Number of common shares =}\left(\frac{\text{ Common stock amount }}{\text{Par value}}\right)\\ =\left(\frac{\$80,000}{\$10}\right)\\ =8,000\end{array}$

Working note (5):

Calculate income from continuing operation earnings per common share:

$\begin{array}{c}\text{Earnings per common share}\text{=}\frac{\text{Income from continuing operation}}{\text{Number of Common stock outstanding}}\\ =\frac{\$8,960}{8,000}\\ =\$1.12\end{array}$

Working note (6):

Calculate income from discontinuing operation earnings per common share:

$\begin{array}{c}\text{Earnings per common share}\text{=}\frac{\text{Income from discontinuing operation}}{\text{Number of Common stock outstanding}}\\ =\frac{\$910}{8,000}\\ =\$.11\end{array}$

3.

To determine

Provide a retained earnings statement for the year 2016.

Explanation of Solution

Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Provide a retained earnings statement for the year 2016.

Company S
Statement of retained earning
For the Year Ended December 31, 2016
Particulars	Amount($)	Amount($)
Retained earnings, January 1, 2016	$83,700
Add: Net income	$9,870
Subtotal		$93,570
Less: Cash dividends declared		($4,800)
Retained earnings, December 31, 2016		$88,770

Table (6)

4.

To determine

Evaluate the return on common equity if it was 10% last year for Company S.

Explanation of Solution

Return on equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on equity is as follows:

$\text{Return on common equity}=\frac{\text{Net income}}{\text{Average common equity}}\times 100$

Evaluate the return on common equity for 2016:

$\begin{array}{c}\text{Return on common equity}=\frac{\text{Net income}}{\text{Average common equity}}\times 100\\ =\frac{\$9,870}{\$150,000}\\ =6.58\%\end{array}$

Thus, the return on common equity is 6.58%.

During 2018, the return on common equity is 10%. This return has been decreased by 3% in the year 2016. The decrease in return on common equity is due to discontinue in the segment due to the tornado which incurred severe loss to the company.