1.
Prepare the worksheet to develop Company S’s financial statements for the first 6 months of 2016.
1.
Explanation of Solution
Worksheet: A worksheet is a tool that is used while preparing a financial statement. It is a type of form, having multiple columns and it is used in the adjustment process.
Prepare the worksheet to develop Company S’s financial statements for the first 6 months of 2016:
Table (1)
Working notes:
a. Calculate the amount of
Bad debt expense = Net sales amount×Average uncollectible accounts=$90,000×.5%=$450
b. Calculate the amount of interest revenue:
Interest revenue = (Note receivable amount×12%×Period from March 1 to June 30)=$4,000×12%×412=$160
c. Calculate the amount of insurance expense:
Insurance expense = (Amount of prepaid insurance×Payment for 6 months)=($960×612)=$480
d. Calculate the amount of
Depreciation expense on Building =[(Building amountEstimated life) × 612 months]= [($55,00025) × 612 months]= $1,100
Depreciation expense on Building =[(Equipment amountEstimated life) × 612 months]= [($20,0008 years) × 612 months]= $1,250
Depreciation expense=($1,100+$1,250)=$2,250
e. Calculate the amount of rent revenue:
Rent revenue = (Amount of unearned rent×Period from 1/2/2016 to 30/6/2016)= $1,800×512=$750
f. Calculate the amount of interest expense:
Interest expense = (Amount of discount on bonds payable+ 10% of discount on bonds payable)=$600+60=$660
g. Calculate the amount of income tax expense for first 6 months:
Calculate estimated annual pre-tax income:
Estimated annual pretax income = (Pre-tax income for 6 months + Pre-tax income for2nd half )= ($90,910−$80,460)+$11,550= $10,450 + $11,550=$22,000
Calculate estimated effective income tax rate:
Estimated effective income tax rate = [(15% on taxable income + 30% on Balance $2,000 income)Estimated annual pretax income]= [($3,000 + $600)$22,000]=16.4
Calculate the amount of income tax expense for first 6 months:
Income tax expensefor first 6 months} = (Pre-tax income for 6 months×Estimated effective income tax rate)=$10,450×16.4%=$1,714
2 (a)
Prepare the income statement for the first 6 months of 2016.
2 (a)
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare the income statement for the first 6 months of 2016:
| Company S | ||
| Interim Income statement | ||
| For the period ended June 30, 2016 | ||
| Particulars | Amount ($) | Amount ($) |
| Sales | 90,000 | |
| Less: Cost of goods sold | (48,600) | |
| Gross profit | 41,400 | |
| Operating expenses: | ||
| Selling expenses | 21,000 | |
| Administrative expenses | 10,200 | |
| Total operating expenses | (31,200) | |
| Pre-tax operating income | 10,200 | |
| Other items: | ||
| Interest revenue | 160 | |
| Rent revenue | 750 | |
| Interest expense | (660) | |
| Total other revenues and expenses | 250 | |
| Income before income taxes | 10,450 | |
| Less: Income tax expense | (1,714) | |
| Net income | $8,736 | |
| Earnings per share | $1.09 | |
Table (2)
Working notes:
h. Calculate earnings per share for 6 months:
Earnings per share for first 6 months = Net income Number of Common stock oustanding= $8,7368,000 Shares=$1.09
2 (b)
Prepare the income statement for the second quarter of 2016.
2 (b)
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare the income statement for the second quarter of 2016:
| Company S | ||
| Interim Income statement | ||
| For the period ended June 30, 2016 | ||
| Particulars | Amount ($) | Amount ($) |
| Sales | 50,000 | |
| Less: Cost of goods sold | (25,600) | |
| Gross profit | 24,400 | |
| Operating expenses: | ||
| Selling expenses | 12,200 | |
| Administrative expenses | 5,990 | |
| Total operating expenses | (18,190) | |
| Pre-tax operating income | 6,210 | |
| Other items: | ||
| Interest revenue | 120 | |
| Rent revenue | 450 | |
| Interest expense | (330) | |
| Total other revenues and expenses | 240 | |
| Income before income taxes | 6,450 | |
| Less: Income tax expense | (1,014) | |
| Net income | $5,436 | |
| Number of shares | 8,000 shares | |
| Earnings per share | $0.68 | |
Table (3)
Working notes:
i. Calculate the amount of sales for second quarter:
Sales for second quarter = (Amount of sales in trial balance as of June 30, 2016−Amount of sales at the end of first quarter of 2016)= $90,000−$40,000=$50,000
j. Calculate the amount of cost of goods sold for 3 months:
Cost of goods sold for second quarter = (Amount of cost of goods sold in trial balance as of June 30, 2016−Amount of cost of goods sold at the end of first quarter of 2016)= $48,600−$23,000=$25,600
k. Calculate the amount of selling expenses for second quarter:
Selling expenses for 3 months = (Amount of selling expenses in the worksheet−Amoutn of selling expense at the end of first quarter of 2016)= ($19,750+$1,250)−$8,800= $21,000 −$8,800=$12,200
l. Calculate the amount of administrative expenses for second quarter:
Administrative expenses for second quarter = (Amount of Administrative expenses in the worksheet−Amoutn of administrative expense at the end of first quarter of 2016)= ($8,170+$450+$480+$1,100)−$4,210= $10,200−$4,210=$5,990
m. Calculate the amount of interest revenue for second quarter:
Interest revenue for second quarter = (Note receivable amount×12%×Revenue earned for 3 months)=$4,000×12%×3/12=$120
n. Calculate the amount of rent revenue for second quarter:
Rent revenue for 3 months =(Amount of unearned rent×Revenue earned for 3 months)=($1,800×312)=$450
o. Calculate the amount of interest expense for second quarter:
Interest expense for 3 months= [(Amount of discount on bonds payable+ 10% of discount on bonds payable)2]=[$600+602]=$330
p. Calculate the amount of income tax expenses for second quarter:
Income tax expenses for 3 months = (Amount of income tax expense in the worksheet−Amoutn of incoem tax expense at the end of first quarter of 2016)= $1,714−$700=$1,014
q. Calculate earnings per share for second quarter:
Earnings per share for 3 months = Net income Number of Common stock oustanding= $5,4368,000 Shares=$0.68
3.
Prepare the statement of
3.
Explanation of Solution
Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.
Prepare the statement of retained earnings for the first 6 months:
| Company S | ||
| Statement of Retained Earnings | ||
| For First 6 Months Ended June 30, 2016 | ||
| Particulars | Amount ($) | Amount ($) |
| Retained earnings, January 1, 2016 | 29,600 | |
| Add: Net income | 8,736 | |
| Subtotal | 38,336 | |
| Less: Dividends | (3,200) | |
| Retained earnings at June 30, 2016 | $35,136 | |
Table (4)
Working note:
r. Calculate the amount of retained earnings, January 1, 2016:
Retained earnings, January 1, 2016 = (Retained earnings amount in trial balance as of June 30, 2016 + Dividend)= $26,400+$3,200=$29,600
4.
Prepare the
4.
Explanation of Solution
Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Interim financial reports: these are the financial reports prepared by the company between the two annual reports.
Prepare the balance sheet as on June 30, 2016 of Company S:
| Company S | ||
| Balance Sheet | ||
| As on June 30, 2016 | ||
| Assets | ||
| Current assets: | Amount ($) | Amount ($) |
| Cash | 7,200 | |
| Accounts receivable | 9,850 | |
| Note receivable | 4,000 | |
| Interest receivable | 160 | |
| Inventory | 24,400 | |
| Prepaid insurance | 480 | |
| Total current assets | 46,090 | |
| Property and equipment | 80,000 | |
| (22,350) | ||
| Net property, plant and equipment | 57,650 | |
| Total assets | $103,740 | |
| Liabilities | ||
| Current liabilities: | ||
| Accounts payable | 8,000 | |
| Interest payable | 600 | |
| Dividends payable | 3,200 | |
| Income tax payable | 1,714 | |
| Unearned rent | 1,050 | |
| Bonds payable | 12,000 | |
| Less: Discount on bonds payable | (540) | 11,460 |
| Total liabilities | 26,024 | |
| Shareholders’ Equity | ||
| Contributed Capital: | ||
| Common stock | 8,000 | |
| Additional paid in capital on common stock | 34,580 | |
| Retained earnings | 35,136 | |
| Total shareholders’ equity | 77,716 | |
| Total liabilities and shareholders’ equity | $103,740 | |
Table (5)
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Chapter 5 Solutions
Intermediate Accounting: Reporting and Analysis
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