1 Effect of Alternative Accounting Methods E 3. At the end of its first year of operations, a company calculated its ending merchandise inventory according to three different accounting methods, as fol- lows: FIFO, $95,000; average cost, $90,000; LIFO, $86,000. If the company used the average-cost method, its net income for the year would be $34,000. 1. Determine net income if the company used the FIFO method. 2. Determine net income if the company used the LIFO method. 3. Which method is more conservative 4. Will the consistency convention be violated if the company chooses to use the LIFO method? Why or why not? 5. Does the full-disclosure convention require disclosure of the inventory method used in the financial statements? 1 Corporate Income Statement E4. Assume that the Cetnar Corporation's chief financial officer gave you the follow- ing information: net sales, $1,900,000, cost of goods sold, $1.050.000; extraordinary gain (net of income taxes of $3,500). $12.500: loss from discontinued operations (net of income tax benefit of $30,000), $50,000, loss on disposal of discontinued opera- tions (net of income tax benefit of $13,000). $35,000, selling expenses, $50,000; administrative expenses, $40,000; income taxes expense on continuing operations, $300,000. From this information, prepare the company's income statement for the year ended June 30, 2011. (Ignore camings per share information.) 101 Corporate Income Statement E 5. The items below are components of Patel Corporation's income statement for the year ended December 31, 2011. Recast the income statement in proper multistep form, including allocating income taxes to appropriate items (assume a 30 percent income tax rate) and showing earnings per share figures (100,000 shares outstanding Sales S 555,000 Cost of goods sold (275,000) Operating expenses (112,500) Restructuring (55,000) Total income taxes expense for period (89.550) Income from discontinued operations 80,000 Gain on disposal of discontinued operations 70,000 Extraordinary gain 36,000 Net income S 208.950 Earnings per share 2.09 4 Statement of Stockholders' Equity E 9. The stockholders' cquity section of Erich Corporation's balance sheet on December 31, 2010, follows. Contributed capital Common stock, $2 par value, 500,000 shares authorized, 400,000 shares issued and outstanding $ 800,000 Additional paid-in capital 1,200,000 Total contributed capital $ 2,000,000 Retained earnings 4,200.000 Total stockholders' equity $ 6,200,000 Prepare a statement of stockholders' equity for the year ended December 31, 2011, assuming these transactions occurred in sequence in 2011: a. Issued 10,000 shares of $100 par value, 9 percent cumulative preferred stock at par after obtaining authorization from the state. b. Issued 40,000 shares of common stock in connection with the conversion of bonds having a carrying value of $600,000. c. Declared and issued a 2 percent common stock dividend. The market value on the date of declaration was $14 per share. d. Purchased 10,000 shares of common stock for the treasury at a cost of $16 per share e. Earned net income of $460.000. f. Declared and paid the full-ycar's dividend on preferred stock and a dividend of $0.40 per share on common stock outstanding at the end of the year. g. Had foreign currency translation adjustment of negative $100,000. Journal Entries: Stock Dividends E 10. Snols Corporation has 30,000 shares of its $i par value common stock out standing. Record in journal form the following transactions as they relate to the company's common stock: Declared a 10 percent stock dividend on common stock to be distributed on August 10 to stockholders of record on July 31 Market value of the stock was $5 per share on this date. 31 Date of record. Aug. 10 Distributed the stock dividend declared on July 17. Sept. 1 Declared a $0.50 per share cash dividend on common stock to be paid on September l to stockholders of record on September 10. Income Tax Allocation E 7. The Danner Corporation reported the following accounting income before income taxes, income taxes expense, and net income for 2011 and 2012: 2011 2012 Income before income taxes Income taxes expense Net income $280,000 88,300 $191,700 $280,000 88,300 $191,700 On the balance sheet, dcferred income taxes liability increased by $38.400 in - 2011 and decreased by $18,800 in 2012. 1. How much did Danner actually pay in income taxes for 2011 and 2012 2. Prepare entries in journal form to record income taxes expense for 2011 and Earnings per Share E 8. During 2011, Arthur Corporation reported a net income of $3,059,000. On January 1, Arthur had 2,800,000 shares of common stock outstanding. The company issued an additional 1,680.000 shares of common stock on October 1. In 2011, the company had a simple capital structure. During 2012, there were no transactions involving common stock, and the company reported net income of $4,032,000. 1. Determine the weighted average number of common shares outstanding cach car. 2. Compute earnings per share for each year, 1 Effect of Alternative Accounting Methods E 3. At the end of its first year of operations, a company calculated its ending merchandise inventory according to three different accounting methods, as fol- lows: FIFO, $95.000; average cost, $90,000, LIFO, $86,000. If the company used the average cost method, its net income for the year would be $34,000. 1. Determine net income if the company used the FIFO method. 2. Determine net income if the company used the LIFO method. 3. Which method is more conservative! 4. Will the consistency convention be violated if the company chooses to use the LIFO method? Why or why not? 5. Does the full-disclosure convention require disclosure of the inventory method used in the financial statements! Corporate income Statement E4. Assume that the Cetnar Corporation's chief financial officer gave you the follow ing information: net sales, $1,900,000; cost of goods sold, $1,050,000, extraordinary gain (net of income taxes of $3,500). $12,500; loss from discontinued operations (net of income tax benefit of $30,000), $50,000, loss on disposal of discontinued opera tions (net of income tax benefit of $13,000), $35,000; selling expenses, $50,000; administrative expenses, S40,000; income taxes expense on continuing operations, $300,000. From this information, prepare the company's income statement for the year ended June 30, 2011. (Ignore earnings per share information) Corporate Income Statement E 5. The items below are components of Patel Corporation's income statement for the year ended December 31, 2011. Recast the income statement in proper multistep form, including allocating income taxes to appropriate items (assume a 30 percent income tax rate) and showing earnings per share figures (100,000 shares outstanding) Sales $ 555,000 Cost of goods sold (275,000) Operating expenses (112,500) Restructuring (55,000) Total income taxes expense for period (89,550) Income from discontinued operations 80,000 Gain on disposal of discontinued operations 70,000 Extraordinary gain 36,000 Net income $ 208.950 Earnings per share $ 2.09 Income Tax Allocation E 7. The Danner Corporation reported the following accounting income before income taxes, income taxes expense, and net income for 2011 and 2012: 2011 2012 Income before income taxes $280,000 $280,000 Income taxes expense 88,300 88,300 Net income $191,700 $191,700 On the balance sheet, deferred income taxes liability increased by $38,400 in 2011 and decreased by $18,800 in 2012. 1. How much did Danner actually pay in income taxes for 2011 and 2012 2. Prepare entries in journal form to record income taxes expense for 2011 and 2012. Earnings per Share E 8. During 2011, Arthur Corporation reported a net income of $3,059,000. On January 1, Arthur had 2,800,000 shares of common stock outstanding. The company issued an additional 1,680,000 shares of common stock on October 1. In 2011, the company had a simple capitai suructure. During 2012, there were no transactions involving common stock, and the company reported net income of $4,032,000. 1. Determine the weighted average number of common shares outstanding each year 2. Compute earnings per shared for each year, Statement of Stockholders' Equity E 9. The stockholders' cquity section of Erich Corporation's balance sheet on December 31, 2010, follows. Contributed capital Common stock, $2 par value, 500,000 shares authorized, 400,000 shares issued and outstanding Additional paid-in capital Total contributed capital Retained earnings Total stockholders' equity $ 800,000 1,200,000 $ 2,000,000 4,200,000 $ 6,200,000 Prepare a statement of stockholders' equity for the year ended December 31, 2011, assuming these transactions occurred in sequence in 2011: a. Issued 10,000 shares of $100 par valuc, 9 percent cumulative preferred stock at par after obtaining authorization from the state. b. Issued 40,000 shares of common stock in connection with the conversion of bonds having a carrying value of $600,000. c. Declared and issued a 2 percent common stock dividend. The market value on the date of declaration was $14 per share. d. Purchased 10,000 shares of common stock for the treasury at a cost of $16 per share. e. Earned net income of $460,000. f. Declared and paid the full-year's dividend on preferred stock and a dividend of $0.40 per share on common stock outstanding at the end of the year, 8. Had foreign currency translation adjustment of negative $100,000. Journal Entries: Stock Dividends E10. Snols Corporation has 30,000 shares of its sl par value common stock out standing. Record in joumal form the following transactions as they relate to the company's common stock July 17 Declared a 10 percent stock dividend on common stock to be distributed on August 10 to stockholders of record on July 31 Market value of the stock was $5 per share on this date. Date of record Distributed the stock dividend declared on July 17. Sept. Declared a $0.50 per share cash dividend on common stock to be paid on September 16 to stockholders of record on September 10 Aug. 10