(Multi-step Income & Retained Earnings) Presented below is information related to

Case Number 01

American Horse Company for 2004.

Retained earnings balance, January 1, 2004 Sales for the year Cost of goods sold Depreciation Expense mistakenly not reported,2002 Telephone - Sales

Advances from customers Interest revenue Rental revenue Write-off of inventory due to obsolescence Accumulated depreciation Equipment Accumulated depreciation Building Write-off of goodwill (Infrequent or Unusual Item) Sales Discounts

Sales Return Overstatement of income due change in inventory costing method Prepaid insurance Income taxes for 2004 Travel and entertainment Advertising Transportation-out Sales commissions Gain on the sale of investments (normal recurring) Loss due to flood damageextraordinary item Loss on the disposition of the wholesale division Loss on operations of the wholesale division Dividends declared on common stock Dividends declared on preferred stock

$ 850,000 35,000,000 17,000,000

32,000

17,000 117,000 70,000 50,000 80,000 40,000 28,000 820,000 15,000 25,000

88,000

20,000 905,000 69,000 54,000 93,000 83,000 110,000 390,000 440,000 90,000 250,000 70,000

Requirement

1. Prepare a multi-step income statement and a retained earnings statement. American Horse Company decided to discontinue its entire wholesale operations and to retain its manufacturing operations. On September 15, American Horse sold the wholesale operations to Rogers Company. During 2004, there were 300,000 shares of common stock outstanding all year. (04)

2. Discuss how the extraordinary gain and losses are treated differently in the income statement as compare to unusual or infrequent item?