Question

Part III: Income Statement (18 points) 1. Presented below is information related to Farr Company for the year 2019. Sales revenue 1,500,000 Interest Revenue 45,000 Interest Expense 65,000 Sales returns and allowances 30,000 Sales discounts 55,000 Selling expenses 195,000 Administrative expenses 84,000 Gain on sale of building 230,000 Loss on operations of discontinued operations 130,000 Gain on disposal of discontinued operations 240,000 Cash dividends declared on common stock 38.000 Cash dividends declared on preferred stock 16,000 Cost of goods sold 730,000 Overstatement of depreciation expense in 2016 42,000 Unrealized holding loss on available for sale securities 60,000 Assume effective tax rate on all applicable items is 19% and 125,000 shares of common stock were outstanding during the year. (15 points) Instructions Compute each of the following for Farr Company a. Income from operations (4 points) b. Income from continuing operations (4 points) c. Comprehensive Income (4 points) d. Earnings per share (just the final number, no need to find EPS from continuing operations or discontinued operations) (3 points) 2. Please answer the following question: In 2020. Acme Corporation changed its method of accounting for inventory from the average cost method to the first in first out method. Inventory in 2020 was correctly recorded using the first in first-out method. The effect of this change on prior years is to increase 2018's cost of goods sold by $100,000 (before taxes) and decrease 2019's cost of goods sold by $120,000 (before taxes). Assume Acme began operations on January 1, 2016. Calculate the cumulative effect of the change in accounting principle on the January 1, 2020 retained earnings (Assume 19% tax rate), (3 points)

Answer 1

Solution:

15,00,000 -30,000 -55,000 Question 1 (a) Computation of Income from Operations Sales Revenue Less: Sales returns and allowances Less: Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses Administrative Expenses Total operating expenses Income from Operations 14,15,000 7,30,000 6,85,000 1,95,000 84,000 2,79,000 4,06,000

4,06,000 45,000 2,30,000 2,75,000 (b) Computation of Income from Continuing Operations Income from Operations Other Incomes and Gains: Interest Revenue Gain on sale of building Other Expenses and Losses: Interest Expense Income before Income Tax Less: Income Tax @ 19% Income from Continuing Operations 65,000 65,000 6,16,000 1,17,040 4,98,960 4,98,960 (c) Computation of Comprehensive Income Income from Continuing Operations Discontinued Operations: Loss on operations of discontinued operations (130,000 * 0.81) Gain on disposal of discontinued operations (240,000 * 0.81) Net Income Other Comprehensive Income: Unrealized holding loss on AFS (60,000 * 0.81) Comprehensive Income 1,05,300 1,94,400 5,88,060 -48,600 5,39,460 (d) Calculation of Earnings per share Net Income Less: Preferred Dividends Earnings available to common stockholders (+) Outstanding shares of Common stock Earnings per share 5,88,060 16,000 5,72,060 1,25,000 4.58