Week 2
Homework Solutions
EXERCISE 4-4 (20–25 minutes)
LEROI JONES INC.
Income Statement
For Year Ended December 31, 2014
Revenues
Net sales ($1,250,000(b) – $17,000)
$1,233,000
Expenses
Cost of goods sold
500,000
Selling expenses
400,000(c)
Administrative expenses
100,000(a)
Interest expense
20,000
Total expenses
1,020,000
Income before income tax
213,000
Income tax
63,900
Net income
$ 149,100
Earnings per share
$ 7.46*
*Rounded
EXERCISE 4-4 (Continued)
Determination of amounts
(a) Administrative expenses
=
20% of cost of good sold
=
20% of $500,000
=
$100,000
(b) Gross sales X 8%
=
administrative expenses
=
$100,000 ÷ 8%
=
$1,250,000
(c) Selling expenses
=
four times administrative expenses.
(operating expenses consist of selling
and administrative expenses; since
selling expenses are 4/5 of operating
expenses, selling expenses are 4
times administrative expenses.)
=
4 X $100,000
=
$400,000
Earnings per share $7.46 ($149,100 ÷ 20,000)
Note: An alternative income statement format is to show income tax part of expenses, and not as a separate item. In this case, total expenses are $1,083,900.
EXERCISE 4-12 (20–25 minutes)
(a) EDDIE ZAMBRANO CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Balance, January 1, as reported
$225,000*
Correction for depreciation error (net of $10,000 tax)
(15,000)
Cumulative decrease in income from change in
inventory methods (net of $14,000 tax)
(21,000)
Balance, January 1, as adjusted
189,000
Add: Net income
144,000**
333,000
Less: Dividends declared
100,000
Balance, December 31
$233,000
*($40,000 + $125,000 + $160,000) – ($50,000 + $50,000)
**[$240,000 – (40% X $240,000)]
(b) Total retained earnings would still be reported as $233,000. A...