E4-6 (Multiple-step and Single-step) The accountant of Whitney Houston Shoe Co.

has compiled
the
following information from the company's records as a basis for an income statement for the year
ended
December 31, 2007.
Rental revenue $ 29,000
Interest on notes payable 18,000
Market appreciation on land above cost 31,000
Wages and salariessales 114,800
Materials and suppliessales 17,600
Income tax 37,400
Wages and salariesadministrative 135,900
Other administrative expenses 51,700
Cost of goods sold 496,000
Net sales 980,000
Depreciation on plant assets (70% selling, 30% administrative) 65,000
Cash dividends declared 16,000
There were 20,000 shares of common stock outstanding during the year.
Selling is $177,900
Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.
(c) Which format do you prefer? Discuss.
(a)

Multiple-Step Form
Whitney Houston Shoe Co.
Income Statement
For the Year Ended December 31, 2007

Net sales.............................................................................

$980,000

Cost of goods sold.............................................................

496,000

Gross profit on sales.........................................................

484,000

Operating Expenses
Selling expenses
Wages and salaries................................................

$114,800

Depr. exp. (70% X $65,000).................................

45,500

Materials and supplies..........................................

17,600

$177,900

Administrative expenses
Wages and salaries................................................

135,900

Other admin. expenses.........................................

51,700

Depr. exp. (30% X $65,000).................................

19,500

Income from operations...................................................

207,100

385,000
99,000

Other Revenues and Gains

Rental revenue............................................................

29,000
128,000

Other Expenses and Losses

Interest expense...........................................................

18,000

Income before income tax................................................

110,000

Income tax...................................................................

37,400

Net income.........................................................................

$ 72,600

Earnings per share ($72,600 20,000)............................

$3.63

(b)

Single-Step Form
Whitney Houston Shoe Co.
Income Statement
For the Year Ended December 31, 2007

Revenues
Net sales.....................................................................................................

$ 980,000

Rental revenue..........................................................................................

29,000

Total revenues.....................................................................................

1,009,000

Expenses
Cost of goods sold.....................................................................................

496,000

Selling expenses.........................................................................................

177,900

Administrative expenses...........................................................................

207,100

Interest expense.........................................................................................

18,000

Total expenses.....................................................................................

899,000

Income before income tax..............................................................................

110,000

Income tax.................................................................................................

37,400

Net income.......................................................................................................

Earnings per share ($72,600 20,000)..........................................................

72,600
$3.63

Note: An alternative income statement format for the single-step form is to show income
tax as part of expense, and not as a separate item.

Rent revenue
Interest expense
Market appreciation on land above cost
Salaries and wages expense (sales)

$31,760
20,760
33,760
117,560

Supplies expense (sales)

20,360

Income tax

33,360

Salaries and wages expense (administrative)

Other administrative expenses

138,660
54,460

Cost of goods sold

518,760

Net sales

982,760

Depreciation on plant assets (70% selling, 30%

administrative)

67,760

Cash dividends declared

18,760

(c)

Single-step:
1.

Simplicity and conciseness.

2.

Probably better understood by users.

3.

Emphasis on total costs and expenses and net income.

4.

Does not imply priority of one revenue or expense over another.

Multiple-step:
1. Provides more information through segregation of operating and nonoperating items.
2. Expenses are matched with related revenue.

E4-16 (Various Reporting Formats) The following information was taken from the records of
Roland Carlson Inc. for the year 2007. Income tax applicable to income from continuing
operations $187,000; income tax applicable to loss on discontinued operations $25,500; income
tax applicable to extraordinary gain $32,300; income tax applicable to extraordinary loss
$20,400; and unrealized holding gain on available-for-sale securities $15,000.
Extraordinary gain $ 95,000 Cash dividends declared $ 150,000
Loss on discontinued operations75,000 Retained earnings January 1, 2007 600,000
Administrative expenses 240,000 Cost of goods sold850,000
Rent revenue40,000 Selling expenses 300,000
Extraordinary loss60,000 Sales 1,900,000
Shares outstanding during 2007 were 100,000.
Instructions
(a) Prepare a single-step income statement for 2007.
(b) Prepare a retained earnings statement for 2007.
(c) Show how comprehensive income is reported using the second income statement format.
(a)

Roland Carlson Inc.

Income Statement
For the Year Ended December 31, 2007

Revenues
Sales........................................................................................................................
................................................................................................................................
................................................................................................................................
Rent revenue
Total revenues.........................................................................................

$1,900,000

40,000
1,940,000

Expenses
Cost of goods sold....................................................................................
Selling expenses.......................................................................................
Administrative expenses.........................................................................
Total expenses..............................................................................
Income from continuing operations before
income tax............................................................................................
Income tax....................................................................................

850,000
300,000
240,000
$1,390,000

550,000
187,000

Income from continuing operations......................................................

Discontinued operations
Loss on discontinued operations................................................
Less: Applicable income tax reduction.....................................
Income before extraordinary items.......................................................
Extraordinary items:
Extraordinary gain.....................................................................
Less: Applicable income tax.......................................................
Extraordinary loss.......................................................................
Less: Applicable income tax reduction.....................................
Net income...............................................................................................

363,000
$75,000
25,500

95,000
32,300
60,000
20,400

49,500
313,500

62,700
376,200
39,600
$ 336,600

Per share of common stock:

Income from continuing operations ($363,000 100,000).......................................
[formula: income from continuing operations / number of shares]
Loss on discontinued operations, net of tax.........................................................
[formula: Loss on discontinued operations / number of shares]
Income before extraordinary items ($313,500 100,000)........................................
[formula: Income before extraordinary items / number of shares]
Extraordinary gain, net of tax...............................................................................
[formula: Extraordinary gain / number of shares]
Extraordinary loss, net of tax................................................................................
[formula: Extraordinary loss / number of shares]
Net income ($336,600 100,000)..........................................................................
[formula: Net income / number of shares]
Extraordinary gain
Loss on discontinued operations
Administrative expenses

$96,500
80,800
248,500

Cash dividends declared

$150,600

Retained earnings January 1, 2012

606,300

Cost of goods sold

851,500

Rent revenue

48,400

Selling expenses

309,800

Extraordinary loss

62,500

Sales Revenue

income tax applicable to income from continuing operations $120,300;

income tax applicable to loss on discontinued operations $28,700;
income tax applicable to extraordinary gain $32,810;
income tax applicable to extraordinary loss $21,250;
unrealized holding gain on available-for-sale securities $19,500 (did not use this)

1,712,600

(b)

Roland Carlson Inc.

Retained Earnings Statement
For the Year Ended December 31, 2007

Retained earnings, January 1.......................................................................................

Add: Net income............................................................................................................

$600,000
336,600
$936,600
150,000
$786,600

Less: Dividends declared...............................................................................................

Retained earnings, December 31..................................................................................

(c)

Roland Carlson Inc.

Comprehensive Income Statement
For the Year Ended December 31, 2007

Net income...........................................................................................................

$336,600

Other comprehensive income

Unrealized holding gain................................................................................

15,000

Comprehensive income.......................................................................................

$351,600

E18-4 (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a
construction job with a contract price of $1,500,000. The job was completed in 2009. The
following information is available.
2007
2008
2009
Costs incurred to date
$400,000
$935,000
$1,070,000
Estimated costs to complete 600,000
165,000
0
Billings to date
300,000
900,000
1,500,000
Collections to date
270,000
810,000
1,425,000
Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of
completion method is used.
(b) Prepare all necessary journal entries for 2008.
(c) Compute the amount of gross profit to be recognized each year assuming the completedcontract method is used.
(a)

Gross profit recognized in:

2007

Contract price

2008
$1,500,000

2009
$1,500,000

$1

Costs:
Costs to date
Estimated costs to

complete

Total estimated profit

$400,000

$935,000

600,000

1,000,000

165,000

$1,070,000
1,100,000

500,000

400,000

40%*

85%**

200,000

340,000

200,000

$ 200,000

$ 140,000

Percentage completed to date

Total gross profit recognized
Less: Gross profit recognized in
previous years
Gross profit recognized in current year

**$400,000 $1,000,000
**$935,000 $1,100,000
#4
2012
Contract price
Costs:
Costs to date
Estimated costs to complete
Total estimated profit
Percentage completed to date
Total gross profit recognized
Less: Gross profit recognized in previous years
Gross profit recognized in current year
*$40
7,40
0 =
$970
,000
**$8
69,4
40
=
$1,1
44,0
00

(b)

2013
$1,680,000
$407,400
562,600

970,000
710,000
x
42%*
298,200
0
$298,200

2014
$1,680,000

$869,440
274,560

1,144,000
536,000
x
76%**
407,360
298,200
$109,160

42%

76%

Construction in Process.................................................................
($935,000 $400,000)
Materials, Cash, Payables, etc........................................

535,000

Accounts Receivable ($900,000 $300,000).................................

600,000

535,000

$
$1,146,000
0
x

Billings on Construction in Process....................................

600,000

Cash ($810,000 $270,000)...........................................................

Accounts Receivable............................................................

540,000

Construction Expenses..................................................................
Construction in Process.................................................................
Revenue from Long-Term Contracts.................................

535,000
140,000

540,000

675,000*

*$1,500,000 X (85% 40%)

(c)

Gross profit recognized in:

Gross profit

2007
$ 0

2008
$ 0

2009
$430,000*

*$1,500,000 $1,070,000

E18-5 (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford

Construction
Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Beth
Botsford uses the percentage-of-completion method for financial accounting purposes. The
income to berecognized each year is based on the proportion of cost incurred to total estimated
costs for completingthe contract. The financial statement presentations relating to this contract at
December 31, 2007, follow.
Balance Sheet
Accounts receivableconstruction contract billings $21,500
Construction in progress $65,000
Less: Contract billings 61,500
Cost of uncompleted contract in excess of billings 3,500
Income Statement
Income (before tax) on the contract recognized in 2007 $18,200
Instructions
(a) How much cash was collected in 2007 on this contract?
(b) What was the initial estimated total income before tax on this contract?
(a)

Contract billings to date

$61,500

Less: Accounts receivable 12/31/07

Portion of contract billings collected
(b)

$18,200
$65,000

21,500
$40,000

= 28%

(The ratio of gross profit to revenue recognized in 2007.)

$1,000,000 X .28 = $280,000
(The initial estimated total gross profit before tax on the contract.)

P18-7 (Long-Term Contract with an Overall Loss) On July 1, 2007, Kyung-wook Construction
Company Inc. contracted to build an office building for Mingxia Corp. for a total contract price
of $1,950,000. On July 1, Kyung-wook estimated that it would take between 2 and 3 years to
complete the building. On December 31, 2009, the building was deemed substantially completed.
Following are accumulated contract costs incurred, estimated costs to complete the contract, and
accumulated billings to Mingxia for 2007, 2008, and 2009.
AtAt At
12/31/07 12/31/0812/31/09
Contract costs incurred to date$ 150,000 $1,200,000 $2,100,000
Estimated costs to complete the contract1,350,000800,000 0
Billings to Mingxia300,0001,100,0001,850,000
Instructions
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss
to be recognized as a result of this contract for the years ended December 31, 2007, 2008, and
2009. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be
recognized as a result of this contract for the years ended December 2007, 2008, and 2009.
(Ignore income taxes.)
(a)

Computation of Recognizable Profit/Loss

Percentage-of-Completion Method
2007
Costs to date (12/31/07)
Estimated costs to complete
Estimated total costs
Percent complete ($150,000 $1,500,000)

$ 150,000
1,350,000
$1,500,000
10%

Revenue recognized ($1,950,000 X 10%)

Costs incurred
Profit recognized in 2007

$ 195,000
150,000
$ 45,000

2008
Costs to date (12/31/08)
Estimated costs to complete
Estimated total costs
Contract price
Total loss

$1,200,000
800,000
2,000,000
1,950,000
$ 50,000

Total loss
Plus gross profit recognized in 2007
Loss recognized in 2008

$
$

50,000
45,000
(95,000)

OR
Percent complete ($1,200,000 $2,000,000)

60%

Revenue recognized in 2008

[($1,950,000 X 60%) $195,000]
Costs incurred in 2008
($1,200,000 $150,000)
Loss to date
Loss attributable to 2009*
Loss recognized in 2008

$ 975,000
1,050,000
75,000
20,000
$ (95,000)

*2009 revenue
($1,950,000 $195,000 $975,000)
2009 estimated costs
2009 loss

$780,000
800,000
$ (20,000)
2009

Costs to date (12/31/09)

Estimated costs to complete
Contract price

$2,100,000
0
2,100,000
1,950,000

Total loss

$ (150,000)

Total loss
Less: Loss recognized in 2008
Gross profit recognized in 2007
Loss recognized in 2009

$ (150,000)

(b)

$95,000
(45,000)

(50,000)
$ (100,000)

Computation of Recognizable Profit/Loss

Completed-Contract Method
2007NONE
2008
Costs to date (12/31/08)

$1,200,000

Estimated costs to complete

800,000

Estimated total costs

2,000,000

Deduct contract price

1,950,000

Loss recognized in 2008

(50,000)

2009
Total costs incurred
Total revenue recognized
Total loss on contract
Deduct loss recognized in 2008
Loss recognized in 2009

$2,100,000
1,950,000
(150,000)
(50,000)
$ (100,000)