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Chapter 4 intermediate accounting IFRS edition 3E

intermediate accounting 1 (‫)ةقراشلا ةعماج‬

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CHAPTER 4
INCOME STATEMENT AND RELATED INFORMATION

CHAPTER LEARNING OBJECTIVES

1. Identify the uses and limitations of an income statement.

2. Describe the content and format of the income statement.
3. Discuss how to report various income items.
4. Explain the reporting of accounting changes and errors.
5. Describe related equity statements.

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4-2 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

TRUE-FALSE—Conceptual

1. The income statement is useful for helping to assess the risk or uncertainty of achieving
future cash flows.

2. A strength of the income statement as compared to the statement of financial position is that
items that cannot be measured reliably can be reported in the income statement.

3. Earnings management generally makes income statement information more useful for
predicting future earnings and cash flows.

4. The transaction approach of income measurement focuses on the income-related activities

that have occurred during the period.

5. Income from operations represents a company’s results before any gain or loss on
discontinued operations.

6. Both revenues and gains increase both net income and equity.

7. Companies frequently report income tax as the last item before net income on the income
statement.

8. The income statement presents subtotals for gross profit, income before continuing
operations, income before income tax, and net income.

9. The nature-of-expense method identifies the major cost drivers and helps users to assess
whether these amounts are appropriate for the revenue generated.

10. Income before income taxes is computed by deducting interest expense from income from
operations.

11. The IASB takes the position that both revenues and expenses and other income and
expense should be reported as part of income from operations.

12. Companies report the results of operations of a component of a business that will be
disposed of separately from continuing operations.

13. Discontinued operations and gains and losses are both reported net of tax in the income
statement.

14. A company that reports a discontinued operation has the option of reporting per share
amounts for this item.

15. Intraperiod tax allocation relates the income tax expense of the period to the specific items
that give rise to the amount of the tax provision.

16. A company recognizes a change in estimate by making a retrospective adjustment to the

financial statements.

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Income Statement and Related Information 4-3

17. Prior period adjustments can either be added or subtracted in the Retained Earnings
Statement.

18. Companies only restrict retained earnings to comply with contractual requirements or
current necessity.

19. Comprehensive income includes all changes in equity during a period except those resulting
from distributions to owners.

20. Comprehensive income can be reported in a statement of changes in equity.

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. T 11. T 16. F
2. F 7. T 12. T 17. T
3. F 8. F 13. F 18. F
4. T 9. F 14. F 19. F
5. F 10. T 15. T 20. T

MULTIPLE CHOICE—Conceptual
21. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations and cumulative
effect.
c. revenues, expenses, gains, and losses.
d. All of these.

22. Information in the income statement helps users to

a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. All of these.

23. Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.
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24. Which of the following would represent the least likely use of an income statement
prepared for a business enterprise?
a. Use by customers to determine a company's ability to provide needed goods and
services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.

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4-4 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

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25. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.

26. The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of a company.
b. Evaluate the solvency of a company.
c. Estimate future cash flows.
d. Estimate future financial flexibility.

27. Which of the following is an example of managing earnings down?

a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.

28. Which of the following is an example of managing earnings up?

a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.

29. What might a manager do during the last quarter of a fiscal year if she wanted to improve
current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.

30. What might a manager do during the last quarter of a fiscal year if she wanted to decrease
current annual net income?
a. Delay shipments to customers until after the end of the fiscal year.
b. Relax credit policies for customers.
c. Pay suppliers all amounts owed.
d. Delay purchases from suppliers until after the end of the fiscal year.

31. The income statement provides investors and creditors information that helps them predict
a. the amounts of future cash flows.
b. the timing of future cash flows.
c. the uncertainty of future cash flows.
d. All of these answers are correct.

32. Investors and creditors use income statement information for each of the following
except to
a. evaluate the future performance of the company.
b. provide a basis for predicting future performance.
c. help assess the risk and uncertainty of achieving future cash flows.
d. All of these answers are correct.

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Income Statement and Related Information 4-5

33. The planned timing of revenues, expenses, gains, and losses to smooth out bumps in
earnings is the definition of
a. quality of earnings.
b. earnings management.
c. smoothing of earnings.
d. earnings averaging.

34. Which of the following situations involving different accounting methods or accounting
estimates results in comparison difficulties between companies?
a. Estimated useful lives for depreciable assets.
b. Inventory methods.
c. Estimates of bad debts.
d. All of the above.

35. Which method of income measurement is used in the preparation of the income
statement?
a. Capital maintenance approach.
b. Transaction approach.
c. Cash-flow approach.
d. Income components approach.

36. Which of the following equations expresses the definition of “income”?

a. Income = Revenues – Expenses
b. Income = (Revenues + Gains) – (Expenses + Losses)
c. Income = Revenues + Gains
d. Income = Gains – Losses

37. Which of the following is not required to be presented on the income statement
under IFRS?
a. Revenue.
b. Other gains/losses.
c. Finance costs.
d. Tax expense.

38. The non-controlling interest section of the income statement is shown

a. below net income.
b. below income from operations.
c. above other income and expenses.
d. above income tax.

39. The definition of expenses includes

a. losses only.
b. expenses and losses.
c. expenses only.
d. expenses, losses and unrealized losses on available-for-sale securities.

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4-6 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

40. IFRS requires that a single amount be disclosed within the income statement for
a. the post-tax profit/loss on discontinued operations and the pre-tax gain/loss on the
disposal of discontinued operational assets.
b. the pre-tax profit/loss on discontinued operations and the post-tax gain/loss on the
disposal of discontinued operational assets.
c. the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss on the
disposal of discontinued operational assets.
d. the post-tax profit/loss on discontinued operations and the post-tax gain/loss on the
disposal of discontinued operational assets.

41. Which of the following is not a generally practiced method of presenting the income
statement?
a. Including prior period adjustments in determining net income.
b. The condensed income statement.
c. The consolidated income statement.
d. Including gains and losses from discontinued operations of a component of a business
in determining net income.

42. The occurrence which most likely would have no effect on 2019 net income (assuming
that all amounts involved are material) is the
a. sale in 2019 of an office building contributed by a stockholder in 1991.
b. collection in 2019 of a receivable from a customer whose account was written off in
2018 by a charge to the allowance account.
c. settlement based on litigation in 2019 of previously unrecognized damages from a
serious accident which occurred in 2017.
d. worthlessness determined in 2019 of stock purchased on a speculative basis in 2015.
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43. The occurrence that most likely would have no effect on 2019 net income is the
a. sale in 2019 of an office building contributed by a stockholder in 1970.
b. collection in 2019 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period discovered
subsequent to their issuance.
d. stock purchased in 2005 deemed worthless in 2019.
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44. Which of the following is not a selling expense?
a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.
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45. The accountant for the Lintz Sales Company is preparing the income statement for 2019
and the statement of financial position at December 31, 2019. The January 1, 2019,
merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the statement of financial position.

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Income Statement and Related Information 4-7

46. In which section of the income statement is interest expense reported?

a. Gross profit.
b. Income from operations.
c. Income before income taxes.
d. Non-controlling interest.

47. If a company prepares a consolidated income statement, IFRS requires that net income
be reported for
a. the majority interest only.
b. the minority interest only.
c. both the majority interest and the minority interest.
d. as a single amount only.

48. Earnings per share relate to

a. preference shares only.
b. ordinary shares only.
c. both preference and ordinary shares.
d. neither preference nor ordinary shares.

49. Undeclared dividends are deducted from net income in the earnings per share
computation for which type of preference shares?
a. Non-cumulative only.
b. Cumulative only.
c. Neither non-cumulative nor cumulative.
d. Both non-cumulative and cumulative.

50. The earnings per share computation is not required for

a. Net income.
b. Gain on disposal of discontinued operation, net of tax.
c. Income from continuing operations.
d. Income from operations.

51. Given the following income statement line items:

Income from operations
Income before income taxes
Income from continuing operations
Income from discontinued operations
Net income
How many earnings per share amounts are required to be disclosed?
a. 5
b. 4
c. 3
d. 2

52. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.

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4-8 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

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53. Earnings per share should always be shown separately for
a. net income and gross profit.
b. net income and pretax income.
c. income from continuing operations.
d. discontinued operations and prior period adjustments.

54. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an other income item.
b. Results of operations of a discontinued component should be disclosed immediately
below income from operations.
c. Earnings per share from both continuing operations and net income should be
disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together
with the results of continuing operations.

55. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.
b. an other income and expense item.
c. an amount after continuing operations and before net income.
d. a bulk sale of plant assets included in income from continuing operations.
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56. Gains or losses on the disposal of investments should be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

57. Income taxes are allocated to

a. continuing operations.
b. discontinued operations.
c. prior period adjustments.
d. All of these answers are correct.

58. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement
either before or after they are included in the tax return.
b. It is required for the cumulative effect of accounting changes but not for prior period
adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting
periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of
tax.

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Income Statement and Related Information 4-9

59. Companies use intraperiod tax allocation for all of the following items except
a. discontinued operations.
b. prior period adjustments.
c. changes in accounting estimates.
d. income from continuing operations.

60. A change in accounting principle requires what kind of adjustment to the financial
statements?
a. Current period adjustment.
b. Prospective adjustment.
c. Retrospective adjustment.
d. Current and prospective adjustment.

61. A change in accounting principle requires that the cumulative effect of the change for prior
periods be shown as an adjustment to
a. beginning retained earnings for the earliest period presented.
b. net income for the period in which the change occurred.
c. comprehensive income for the earliest period presented.
d. stockholders’ equity for the period in which the change occurred.

62. Changes in estimates affect reported amounts

a. retrospectively only.
b. prospectively only.
c. currently and prospectively.
d. currently and retrospectively.

63. Prior years income statements are not restated for

a. changes in accounting principle.
b. changes in estimates.
c. corrections of errors.
d. All of these answer choices are correct.

64. In 2019, Milford Corporation determined that it overstated salaries payable and salaries
expense by $20,000 in 2018. In 2019, which of the following accounts will have to be
credited to correct this error?
a. Salaries and Wages Payable.
b. Salaries and Wages Expense.
c. Retained Earnings.
d. Income Summary.

65. Which of the following does not appear on a statement of retained earnings?
a. Net loss.
b. Prior period adjustments.
c. Preference share dividends.
d. Other comprehensive income.

66. Which of the following would appear first in a statement of retained earnings?
a. Net income.
b. Prior period adjustment.
c. Cash dividends.
d. Share dividends.

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4 - 10 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

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67. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
b. No No
c. Yes No
d. No Yes

68. Which of the following items will not appear in the retained earnings statement?
a. Net loss.
b. Prior period adjustment.
c. Discontinued operations.
d. Dividends.

69. Watts Corporation made a very large arithmetical error in the preparation of its year-end
financial statements by improper placement of a decimal point in the calculation of
depreciation. The error caused the net income to be reported at almost double the proper
amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately
listed on the income statement and fully explained in a note to the financial
statements.
c. an other expense item for the year in which the error was made.
d. a prior period adjustment.

70. Which of the following is included in comprehensive income?

a. Investments by owners.
b. Unrealized gains on non-trading equity securities.
c. Distributions to owners.
d. Changes in accounting principles.

71. Which of the following is not an acceptable way of displaying the components of other
comprehensive income?
a. Combined statement of retained earnings.
b. Second income statement.
c. Combined statement of comprehensive income.
d. All of the above are acceptable.

72. Comprehensive income includes all of the following except

a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.

73. Comprehensive income includes all of the following, except

a. revenues and gains.
b. expenses and losses.
c. preference share dividends.
d. unrealized gains and losses on non-trading equity securities.

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Income Statement and Related Information 4 - 11

74. Under IFRS other comprehensive income must be displayed (reported) in

a. the equity section of the statement of financial position.
b. a second income statement.
c. the comprehensive income statement or the income statement and comprehensive
income statement.
d. the retained earnings the statement.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 29. b 37. b 45. b 53. c 61. a 69. d
22. d 30. a 38. a 46. c 54. c 62. c 70. b
23. b 31. d 39. b 47. c 55. c 63. b 71. a
24. d 32. a 40. d 48. b 56. c 64. c 72. c
25. d 33. b 41. a 49. b 57. d 65. d 73. c
26. c 34. d 42. b 50. d 58. d 66. b 74. b
27. b 35. b 43. c 51. c 59. c 67. d
28. c 36. c 44. b 52. d 60. c 68. c

MULTIPLE CHOICE—Computational
75. Ortiz Co. had the following account balances:
Sales revenue € 120,000
Cost of goods sold 60,000
Salaries and wages expense 10,000
Depreciation expense 20,000
Dividend revenue 4,000
Utilities expense 8,000
Rent revenue 25,000
Interest expense 12,000
Sales returns 11,000
Advertising expense 13,000
What amount would Ortiz report as other income and expense in its income statement?
a. €29,000
b. €17,000
c. €25,000
d. €13,000

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4 - 12 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

76. Ortiz Co. had the following account balances:

Sales revenue € 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns 16,500
Advertising expense 19,500
What amount would Ortiz report as income from operations in its income statement?
a. €73,500
b. €45,000
c. €33,000
d. €15,000

77. For Mortenson Company, the following information is available:

Cost of goods sold ₤240,000
Sales discounts 8,000
Income tax expense 24,000
Operating expenses 92,000
Sales revenue 400,000
In Mortenson’s income statement, gross profit
a. should not be reported.
b. should be reported at ₤36,000.
c. should be reported at ₤152,000.
d. should be reported at ₤160,000.

78. For Rondelli Company, the following information is available:

Cost of goods sold €270,000
Sales returns and allowances 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli's income statement, gross profit
a. should not be reported.
b. should be reported at €36,000.
c. should be reported at €168,000.
d. should be reported at €180,000.

79. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to €13,720,000; sales returns and allowances were €370,000, sales discounts
were €175,000, and freight-out was €140,000. Net sales last year for Lang Company were
a. €13,720,000.
b. €13,350,000.
c. €13,175,000.
d. €13,035,000.

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Income Statement and Related Information 4 - 13

80. Use the following information (in thousands):

Service Revenue ¥1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,000,000
Income before income tax 400,000

Determine the amount of other income and expense.

a. ¥40,000
b. ¥160,000
c. ¥200,000
d. ¥20,000

81. Use the following information (in thousands):

Service Revenue ¥1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,000,000
Income before income tax 400,000

Determine the amount of financing costs.

a. ¥40,000
b. ¥20,000
c. ¥200,000
d. ¥160,000

82. Use the following information (in thousands):

Service Revenue ¥1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,000,000
Income before income tax 400,000

Determine the amount of income tax.

a. ¥40,000
b. ¥20,000
c. ¥200,000
d. ¥160,000

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4 - 14 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

83. Use the following information (in thousands):

Revenues ¥1,600,000
Income from continuing operations 200,000
Net Income 180,000
Income from operations 440,000
Selling & administrative expenses 1,000,000
Income before income tax 400,000

Determine the amount of discontinued operations.

a. ¥(40,000)
b. ¥160,000
c. ¥200,000
d. ¥(20,000)

84. Use the following information (in thousands):

Sales revenue ¥300,000
Gain on sale of equipment 90,000
Cost of goods sold 164,000
Interest expense 16,000
Selling & administrative expenses 30,000
Income tax rate 30%

Determine the amount of income from operations.

a. ¥76,000
b. ¥196,000
c. ¥60,000
d. ¥180,000

85. Use the following information (in thousands):

Sales revenue ¥300,000
Gain on sale of equipment 90,000
Cost of goods sold 164,000
Interest expense 16,000
Selling & administrative expenses 30,000
Income tax rate 30%

Determine the amount of income before taxes.

a. ¥76,000
b. ¥196,000
c. ¥60,000
d. ¥180,000

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Income Statement and Related Information 4 - 15

86. Use the following information (in thousands):

Sales revenue ¥300,000
Gain on sale of equipment 90,000
Cost of goods sold 164,000
Interest expense 16,000
Selling & administrative expenses 30,000
Income tax rate 30%

Determine the amount of income taxes.

a. ¥8,000
b. ¥18,000
c. ¥27,000
d. ¥54,000

87. Use the following information (in thousands):

Sales revenue ¥300,000
Gain on sale of equipment 90,000
Cost of goods sold 164,000
Interest expense 16,000
Selling & administrative expenses 30,000
Income tax rate 30%

Determine the amount of net income.

a. ¥126,000
b. ¥21,000
c. ¥42,000
d. ¥63,000

88. Majors Corporation had income from continuing operations of ₤1,800,000 in 2019. During
2019 it disposed of its repair division at a pre-tax gain of ₤27,000. Prior to disposal, the
division operated at a pre-tax loss of ₤45,000. The tax rate was 30%. What is the net
income for 2019?
a. ₤1,782,000
b. ₤1,728,000
c. ₤1,749,600
d. ₤1,787,400

89. Manning Company has the following items: write-down of inventories, €240,000; loss on
disposal of part of Sports Division, €370,000; and loss on restructurings, €226,000.
Ignoring income taxes, what total amount should Manning Company report as other
income and expense?
a. €836,000
b. €370,000
c. €466,000
d. €596,000

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4 - 16 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

90. Garwood Company has the following items: write-down of inventories, ₤480,000; loss on
disposal of part of Sports Division, ₤740,000; and loss due to an asset impairment,
₤452,000. Ignoring income taxes, what total amount should Garwood Company report as
other income and expense?
a. ₤1,672,000
b. ₤740,000
c. ₤932,000
d. ₤1,192,000

91. At Ruth Company, events and transactions during 2019 included the following. The tax
rate for all items is 30%.
(1) Depreciation for 2017 was found to be understated by €45,000.
(2) A litigation settlement resulted in a loss of €37,500.
(3) The inventory at December 31, 2017 was overstated by €60,000.
(4) The company disposed of its recreational division at a loss of €750,000.

The effect of these events and transactions on 2019 income from continuing operations
net of tax would be
a. €26,250.
b. €57,750.
c. €99,750.
d. €624,750.

92. At Ruth Company, events and transactions during 2019 included the following. The tax
rate for all items is 30%.
(1) Depreciation for 2017 was found to be understated by €45,000.
(2) A litigation settlement resulted in a loss of €37,500.
(3) The inventory at December 31, 2017 was overstated by €60,000.
(4) The company disposed of its recreational division at a loss of €750,000.

The effect of these events and transactions on 2019 net income net of tax would be
a. €26,250.
b. €551,250.
c. €582,750.
d. €624,750.

93. During 2019, Lopez Corporation disposed of Pine Division, a major component of its
business. Lopez realized a gain of €1,500,000, net of taxes, on the sale of Pine's assets.
Pine's operating losses, net of taxes, were €1,800,000 in 2019. How should these facts be
reported in Lopez's income statement for 2019?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a. €1,800,000 loss €1,500,000 gain
b. 300,000 loss 0
c. 0 300,000 loss
d. 1,500,000 gain 1,800,000 loss

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Income Statement and Related Information 4 - 17

94. In 2019, Esther Corporation reported net income of ₤1,000,000. It declared and paid
preference dividends of ₤250,000 and ordinary share dividends of ₤100,000. During 2019,
Esther had a weighted average of 250,000 ordinary shares outstanding. Compute
Esther's 2019 earnings per share.
a. ₤2.60
b. ₤3.00
c. ₤4.00
d. ₤5.00

95. In 2019, Linz Corporation reported a discontinued operations loss of €1,000,000, net of
tax. It declared and paid preference dividends of €100,000 and ordinary share dividends
of €300,000. During 2019, Linz had a weighted average of 400,000 ordinary shares
outstanding. Compute the effect of the discontinued operations loss, net of tax, on earnings per
share.
a. €1.50
b. €1.75
c. €2.25
d. €2.50

96. In 2019, Benfer Corporation reported net income of ₤350,000. It declared and paid
ordinary share dividends of ₤40,000 and had a weighted average of 100,000 ordinary
shares outstanding. Compute the earnings per share to the nearest cent.
a. ₤3.10
b. ₤2.45
c. ₤3.15
d. ₤3.50

97. Benedict Corporation reports the following information:

Net income €500,000
Dividends on ordinary shares 140,000
Dividends on preference shares 60,000
Weighted average ordinary shares outstanding 125,000
Benedict should report earnings per share of
a. €2.40.
b. €2.88.
c. €3.52.
d. €4.00.

98. Norling Corporation reports the following information:

Net income €500,000
Dividends on ordinary shares 140,000
Dividends on preference shares 60,000
Weighted average ordinary shares outstanding 250,000
Norling should report earnings per share of
a. €1.20.
b. €1.44.
c. €1.76.
d. €2.00.

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4 - 18 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

99. In 2019, Timmons Company reported net income of ₤1,000,000. It declared and paid
preference share dividends of ₤100,000 and ordinary share dividends of ₤125,000. During
2019, Timmons had a weighted average of 150,000 ordinary shares outstanding. The
2019 earning per share for Timmons Company is:.
a. ₤6.67
b. ₤6.00
c. ₤5.83
d. ₤5.17

100. Given the following:

Net income €800,000
EPS 4.25
Dividend/ordinary shares 2.00
Weighted average ordinary shares outstanding 160,000
Determine the amount of the preference share dividend.
a. €480,000
b. €320,000
c. €160,000
d. €120,000

101. Use the following information:

Gross profit ₤3,900,000
Loss on sale of investments 10,000
Interest expense 7,500
Gain on sale of discontinued operations 30,000
Income tax rate 20%

Compute the amount of income tax applicable to continuing operations.

a. ₤776,500
b. ₤820,000
c. ₤784,500
d. ₤784,000

102. Use the following information:

Gross profit ₤3,900,000
Loss on sale of investments 10,000
Interest expense 7,500
Gain on sale of discontinued operations 30,000
Income tax rate 20%

Compute the amount of discontinued operations to be combined with income from

continuing operations on the income statement.
a. ₤30,000
b. ₤24,000
c. ₤6,000
d. None of the above.

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Income Statement and Related Information 4 - 19

103. Use the following information:

Gross profit ₤3,900,000
Loss on sale of investments 10,000
Interest expense 7,500
Gain on sale of discontinued operations 30,000
Income tax rate 20%

Compute the total amount of income tax expense experienced by the company.
a. ₤765,000
b. ₤800,000
c. ₤782,500
d. ₤1,005,000

104. Sandstrom Corporation has a discontinued operations loss of €100,000, an unusual gain
of €70,000, and a tax rate of 40%. At what amount should Sandstrom report each item?
Discontinued loss Unusual gain
a. €(100,000) €70,000
b. (100,000) 42,000
c. (60,000) 70,000
d. (60,000) 42,000

105. Prophet Corporation has a discontinued operations loss of ₤300,000, an unusual gain of
₤210,000, and a tax rate of 40%. At what amount should Prophet report each item?
Discontinued loss Unusual gain
a. ₤(300,000) ₤210,000
b. (300,000) 126,000
c. (180,000) 210,000
d. (180,000) 126,000

106. Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of
€262,000. It also has the following items (gross amounts).
Unusual loss € 37,000
Discontinued operations loss 101,000
Gain on disposal of equipment 8,000
Change in accounting principle
increasing prior year's income 53,000
What is the amount of income tax expense Arreaga would report on its income statement?
a. €104,800
b. €93,200
c. €111,200
d. €74,000

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4 - 20 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

107. Palomo Corp has a tax rate of 30 percent and income before considering the items below
of ₤377,000. It also has the following items (gross amounts).
Unusual gain ₤ 23,000
Loss from discontinued operations 183,000
Dividend revenue 6,000
Income increasing prior
period adjustment 74,000
What is the amount of income tax Palomo would report on its income statement?
a. ₤121,800
b. ₤ 66,900
c. ₤ 89,100
d. ₤114,900

108. Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what
would be the income tax expense reported on the face of the income statement?
Sales revenue € 110,000
Cost of goods sold 60,000
Salaries and wages expense 8,000
Depreciation expense 11,000
Dividend revenue 9,000
Utilities expense 1,000
Loss from discontinued operations 10,000
Interest expense 2,000
a. €14,800
b. €10,800
c. €11,200
d. € 7,200

109. Moorman Corporation reports the following information:

Correction of understatement of depreciation expense
in prior years, net of tax € 430,000
Dividends declared, 2019 320,000
Net income for 2019 1,000,000
Retained earnings, 1/1/19, as reported 2,500,000
Moorman should report retained earnings, January 1, 2019, as adjusted at
a. €2,070,000.
b. €2,500,000.
c. €2,930,000.
d. €3,610,000.

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Income Statement and Related Information 4 - 21

110. Moorman Corporation reports the following information:

Correction of understatement of depreciation expense
in prior years, net of tax € 430,000
Dividends declared, 2019 320,000
Net income for 2019 1,000,000
Retained earnings, 1/1/19, as reported 2,500,000
Moorman should report retained earnings, December 31, 2019, of
a. €2,070,000.
b. €2,750,000.
c. €3,180,000.
d. €3,610,000.

111. Leonard Corporation reports the following information:

Correction of overstatement of depreciation expense
in prior years, net of tax ₤ 215,000
Dividends declared, 2019 160,000
Net income for 2019 500,000
Retained earnings, 1/1/19, as reported 1,200,000
Leonard should report retained earnings, January 1, 2019, as adjusted at
a. ₤985,000.
b. ₤1,200,000.
c. ₤1,415,000.
d. ₤1,755,000.

112. Leonard Corporation reports the following information:

Correction of overstatement of depreciation expense
in prior years, net of tax ₤ 215,000
Dividends declared, 2019 160,000
Net income for 2019 500,000
Retained earnings, 1/1/19, as reported 1,200,000
Leonard should report retained earnings, December 31, 2019, at
a. ₤985,000.
b. ₤1,325,000.
c. ₤1,540,000.
d. ₤1,755,000.

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4 - 22 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

113. The following information was extracted from the accounts of Essex Corporation at
December 31, 2019:
CR(DR)
Total reported income since incorporation ₤1,900,000
Total cash dividends paid (800,000)
Unrealized holding loss (120,000)
Total share dividends distributed (200,000)
Prior period adjustment, recorded January 1, 2019 75,000
What should be the balance of retained earnings at December 31, 2019?
a. ₤855,000
b. ₤900,000
c. ₤780,000
d. ₤975,000

114. Pullman Corporation had retained earnings of €2,100,000 at January 1, 2019. During the
year the company experienced a net loss of €900,000 and declared cash dividends of
€240,000. Determine the retained earnings balance at December 31, 2019.
a. €2,760,000
b. €1,200,000
c. €3,000,000
d. €960,000

115. Pullman Corporation had retained earnings of €2,100,000 at January 1, 2019. During the
year the company experienced a net loss of €900,000 and declared cash dividends of
€240,000. It was discovered in 2019 that €150,000 of repair expense was debited to the
Land account in 2018. The income tax rate is 20%. Determine the retained earnings
balance at December 31, 2019.
a. €810,000
b. €1,080,000
c. €1,050,000
d. €840,000

116. Rodriquez Corporation had retained earnings of €850,000 at January 1, 2019. During the
year the company generated a net income of €150,000 and declared share dividends of
€50,000. It was discovered during 2019 that €40,000 of closing costs on a 2018 purchase
of land was debited to Maintenance Expense. The income tax rate is 30%. Determine the
retained earnings balance at December 31, 2019.
a. €978,000
b. €960,000
c. €910,000
d. €938,000

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Income Statement and Related Information 4 - 23

117. On January 1, 2019, Zhang Inc. had cash and share capital of ¥10,000,000. At that date,
the company had no other asset, liability, or equity balances. On January 5, 2019, it
purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It
received cash dividends of ¥800,000 during the year on these securities. In addition, it has
an unrealized loss on these securities of ¥600,000. The tax rate is 20%.

Compute the amount of net income/(loss).

a. ¥800,000
b. ¥640,000
c. ¥(200,000)
d. ¥160,000

118. On January 1, 2019, Zhang Inc. had cash and share capital of ¥10,000,000. At that date,
the company had no other asset, liability, or equity balances. On January 5, 2019, it
purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It
received cash dividends of ¥800,000 during the year on these securities. In addition, it has
an unrealized loss on these securities of ¥600,000. The tax rate is 20%.

Compute the amount of comprehensive income.

a. ¥200,000
b. ¥160,000
c. ¥640,000
d. ¥600,000

119. On January 1, 2019, Zhang Inc. had cash and share capital of ¥10,000,000. At that date,
the company had no other asset, liability, or equity balances. On January 5, 2019, it
purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It
received cash dividends of ¥800,000 during the year on these securities. In addition, it has
an unrealized loss on these securities of ¥600,000. The tax rate is 20%.

Compute the amount of other comprehensive income/(loss).

a. ¥(480,000)
b. ¥(600,000)
c. ¥200,000
d. ¥160,000

120. On January 1, 2019, Zhang Inc. had cash and share capital of ¥10,000,000. At that date,
the company had no other asset, liability, or equity balances. On January 5, 2019, it
purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It
received cash dividends of ¥800,000 during the year on these securities. In addition, it has
an unrealized loss on these securities of ¥600,000. The tax rate is 20%.

Compute the amount of accumulated other comprehensive income/(loss).

a. ¥(600,000)
b. ¥200,000
c. ¥160,000
d. (¥480,000)

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4 - 24 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

121. Madsen Company reported the following information for 2019:

Sales revenue ₤510,000
Cost of goods sold 350,000
Operating expenses 55,000
Unrealized holding gain on available-for-sale securities 30,000
Cash dividends received on the securities 2,000
For 2019, Madsen would report other comprehensive income of
a. ₤137,000.
b. ₤135,000.
c. ₤32,000.
d. ₤30,000.

122. Korte Company reported the following information for 2019:

Sales revenue ₤500,000
Cost of goods sold 350,000
Operating expenses 55,000
Unrealized holding gain on available-for-sale securities 25,000
Cash dividends received on the securities 2,000
For 2019, Korte would report comprehensive income of
a. ₤122,000.
b. ₤120,000.
c. ₤97,000.
d. ₤25,000.

123. For the year ended December 31, 2019, Transformers Inc. reported the following:
Net income €120,000
Preference dividends declared 20,000
Ordinary share dividends declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings 160,000
Share capital – ordinary 80,000
Accumulated other comprehensive income,
Beginning balance 10,000

What would Transformers report as its ending balance of Accumulated Other

Comprehensive Income?
a. €12,000
b. €10,000
c. €8,000
d. €2,000

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Income Statement and Related Information 4 - 25

124. For the year ended December 31, 2019, Transformers Inc. reported the following:
Net income €120,000
Preference dividends declared 20,000
Ordinary share dividends declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings, beginning balance 160,000
Share capital – ordinary 80,000
Accumulated other comprehensive income,
Beginning balance 10,000
What would Transformers report as the ending balance of Retained Earnings?
a. €278,000
b. €266,000
c. €256,000
d. €254,000

125. For the year ended December 31, 2019, Transformers Inc. reported the following:
Net income €120,000
Preference dividends declared 20,000
Ordinary share dividends declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings, beginning balance 160,000
Share capital – ordinary 80,000
Accumulated other comprehensive income,
Beginning balance 10,000
What would Transformers report as total stockholders' equity?
a. €344,000
b. €336,000
c. €256,000
d. €240,000

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
75. a 84. b 93. c 102. b 111. c 120. d
76. c 85. d 94. b 103. c 112. d 121. d
77. c 86. d 95. d 104. c 113. d 122. a
78. c 87. a 96. d 105. c 114. d 123. c
79. c 88. d 97. c 106. b 115. d 124. c
80. b 89. a 98. c 107. a 116. a 125. a
81. a 90. a 99. b 108. a 117. b
82. c 91. a 100. d 109. a 118. b
83. d 92. b 101 a 110. b 119. a

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4 - 26 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

MULTIPLE CHOICE—CPA Adapted

126. Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2019, included the following
expense accounts:
Accounting and legal fees €140,000
Advertising 100,000
Freight-out 75,000
Interest 60,000
Loss on sale of long-term investments 30,000
Officers' salaries 170,000
Rent for office space 180,000
Sales salaries and commissions 110,000
One-half of the rented premises is occupied by the sales department.

How much of the expenses listed above should be included in Perry's selling expenses for
2019?
a. €210,000
b. €285,000
c. €300,000
d. €375,000

127. Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2019, included the following
expense accounts:
Accounting and legal fees €140,000
Advertising 100,000
Freight-out 75,000
Interest 60,000
Loss on sale of long-term investments 30,000
Officers' salaries 170,000
Rent for office space 180,000
Sales salaries and commissions 110,000
One-half of the rented premises is occupied by the sales department.

How much of the expenses listed above should be included in Perry's general and
administrative expenses for 2019?
a. €400,000
b. €430,000
c. €460,000
d. €490,000

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Income Statement and Related Information 4 - 27

128. Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2019 included the following
expense and loss accounts:
Accounting and legal fees ₤140,000
Advertising 160,000
Freight-out 80,000
Interest 70,000
Loss on sale of long-term investment 30,000
Officers' salaries 225,000
Rent for office space 220,000
Sales salaries and commissions 170,000
One-half of the rented premises is occupied by the sales department. Didde's total selling
expenses for 2019 are
a. ₤520,000.
b. ₤440,000.
c. ₤410,000.
d. ₤350,000.

129. The following items were among those that were reported on Dye Co.'s income statement
for the year ended December 31, 2019:
Legal and audit fees ₤150,000
Rent for office space 180,000
Interest on bank loan 210,000
Loss on abandoned equipment used in operations 35,000
The office space is used equally by Dye's sales and accounting departments. What
amount of the above-listed items should be classified as general and administrative
expenses in Dye's income statement?
a. ₤240,000
b. ₤275,000
c. ₤330,000
d. ₤450,000

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4 - 28 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

130. Logan Corp.'s trial balance of income statement accounts for the year ended December
31, 2019 included the following:
Debit Credit
Sales revenue €140,000
Cost of sales € 60,000
Administrative expenses 25,000
Loss on sale of equipment 9,000
Commissions to salespersons 8,000
Interest revenue 5,000
Freight-out 3,000
Loss on disposition of wholesale division 17,000
Bad debt expense 3,000
Totals €125,000 €145,000
Other information:
Logan's income tax rate is 30%. Merchandise inventory:
January 1, 2019 €80,000
December 31, 2019 70,000
On Logan's income statement for 2019, merchandise purchases are
a. €73,000.
b. €70,000.
c. €53,000.
d. €50,000.

131. Logan Corp.'s trial balance of income statement accounts for the year ended December
31, 2019 included the following:
Debit Credit
Sales revenue €140,000
Cost of sales € 60,000
Administrative expenses 25,000
Loss on sale of equipment 9,000
Commissions to salespersons 8,000
Interest revenue 5,000
Freight-out 3,000
Loss on disposition of wholesale division 17,000
Bad debt expense 3,000
Totals €125,000 €145,000
Other information:
Logan's income tax rate is 30%. Merchandise inventory:
January 1, 2019 €80,000
December 31, 2019 70,000
On Logan's income statement for 2019, income from continuing operations is
a. €54,000.
b. €20,000.
c. €37,000.
d. €32,000.

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Income Statement and Related Information 4 - 29

132. Logan Corp.'s trial balance of income statement accounts for the year ended December
31, 2019 included the following:
Debit Credit
Sales revenue €140,000
Cost of sales € 60,000
Administrative expenses 25,000
Loss on sale of equipment 9,000
Commissions to salespersons 8,000
Interest revenue 5,000
Freight-out 3,000
Loss on disposition of wholesale division 17,000
Bad debt expense 3,000
Totals €125,000 €145,000
Other information:
Logan's income tax rate is 30%. Merchandise inventory:
January 1, 2019 €80,000
December 31, 2019 70,000
On Logan's income statement for 2019, discontinued operations loss is
a. €11,900.
b. €17,000.
c. €18,200.
d. €26,000.

133. Chase Corp. had the following infrequent transactions during 2019:
A ₤300,000 gain from selling its automotive division.
A ₤420,000 gain on the sale of investments.
A ₤140,000 loss on the write-down of inventories.
In its 2019 income statement, what amount should Chase report as other income and
expense?
a. ₤160,000
b. ₤280,000
c. ₤580,000
d. ₤720,000

134. James, Inc. incurred the following infrequent losses during 2019:
A ₤105,000 impairment loss on intangible assets.
A ₤60,000 litigation settlement (loss).
A ₤90,000 write-off of obsolete inventory.
In its 2019 income statement, what amount should James report as other income and
expense?
a. ₤255,000
b. ₤195,000
c. ₤165,000
d. ₤150,000

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4 - 30 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

135. Which of the following should be reported as a prior period adjustment?

Change in Estimated Lives Change from Unaccepted
of Depreciable Assets Principle to Accepted Principle
a. Yes Yes
b. No Yes
c. Yes No
d. No No

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
126. d 128. a 130. d 132. a 134. a
127. a 129. a 131. c 133. b 135. b

DERIVATIONS — Computational
No. Answer Derivation
75. a €25,000 + €4,000 = €29,000.

76 c €51,000 – €12,000 + €30,000 – €16,500 – €19,500 = €33,000.

77. c ₤400,000 – ₤8,000 – ₤240,000 = ₤152,000.

78. c €450,000 – €12,000 – €270,000 = €168,000.

79. c €13,720,000 – €370,000 – €175,000 = €13,175,000.

80. b ¥1,600,000 – ¥1,000,000 – 440,000 = ¥160,000.

81. a ¥440,000 – ¥400,000 = ¥40,000.

82. c ¥400,000 – ¥200,000 = ¥200,000.

83. d ¥200,000 – ¥180,000 = ¥(20,000)

84. b ¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 = ¥196,000.

85. d ¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 – ¥16,000 = ¥180,000.

86. d ¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 – ¥16,000 = ¥180,000;

¥180,000  0.30 = ¥54,000.

87. a ¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 – ¥16,000 = ¥180,000;

¥180,000 – ¥54,000 = ¥126,000

88. d ₤1,800,000 – [(₤45,000 – ₤27,000) – ((₤45,000 – ₤27,000)  0.30)]

= ₤1,787,400.

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Income Statement and Related Information 4 - 31

No. Answer Derivation

89. a €240,000 + €$370,000 + €226,000 = €836,000.

90. a ₤480,000 + ₤740,000 + ₤452,000 = ₤1,672,000.

91. a €37,500 – €11,250 = €26,250.

92. b €26,250 + (€750,000 × 0.70) = €551,250.

93. c €1,800,000 – €1,500,000 = €300,000.

94. b (₤1,000,000 – ₤250,000) ÷ 250,000 sh. = ₤3.00.

95. d €1,000,000 ÷ 400,000 sh. = €2.50.

96. d ₤350,000 ÷ 100,000 sh. = ₤3.50.

97. c (€500,000 – €60,000) ÷ 125,000 = €3.52.

98. c (€500,000 – €60,000) ÷ 250,000 = €1.76.

99. b (₤1,000,000 – ₤100,000) ÷ 150,000 = ₤6.00.

100. d (€800,000 – X) ÷ 160,000 = €4.25.

€800,000 – X = €680,000 = €120,000.

101. a (₤3,900,000 – ₤10,000 – ₤7,500) × 0.20 = ₤776,500.

102. b ₤30,000 – (₤30,000  0.20) = ₤24,000.

103. c [(₤3,900,000 – ₤10,000 – ₤7,500)  0.20] + (₤30,000  0.20) = ₤782,500.

104. c €100,000 × 0.60 = €60,000.

105. c ₤300,000 × 0.60 = ₤180,000.

106. b (€262,000 – €37,000 + €8,000) × 0.40 = €93,200.

107. a (₤377,000 + ₤23,000 + ₤6,000) × 0.30 = ₤121,800.

108. a (€110,000 – €60,000 – €8,000 – €11,000 + €9,000 – €1,000 – €2,000) x

0.40 = €14,800.

109. a €2,500,000 – €430,000 = €2,070,000.

110. b €2,500,000 – €430,000 + €1,000,000 – €320,000 = €2,750,000.

111. c ₤1,200,000 + ₤215,000 = ₤1,415,000.

112. d ₤1,200,000 + ₤215,000 + ₤500,000 – ₤160,000 = ₤1,755,000.

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4 - 32 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

No. Answer Derivation

113. d ₤1,900,000 – ₤800,000 – ₤200,000 + ₤75,000 = ₤975,000.

114. d €2,100,000 – €900,000 – €240,000 = €960,000.

115. d €2,100,000 – €900,000 – €240,000 – (€150,000  0.80) = €840,000.

116. a €850,000 + €150,000 – €50,000 + (€40,000  0.70) = €978,000.

117. b ¥800,000 – (¥800,000  0.20) = ¥640,000.

118. b (¥800,000 – ¥600,000) = ¥200,000  0.80 = ¥160,000.

119. a ¥600,000 – (¥600,000  0.20) = ¥480,000

120. d ¥600,000 – (¥600,000  0.20) = ¥480,000

121. d Other comprehensive income = ₤30,000.

122. a ₤500,000 – ₤350,000 – ₤55,000 + ₤25,000 + ₤2,000 = ₤122,000.

123. c ₤10,000 – ₤2,000 = ₤8,000.

124. c €160,000 + €120,000 - €20,000 – €4,000 = €$256,000.

125. a (€160,000 + €120,000 – €20,000 – €4,000) + €80,000 + (€10,000 – €2,000)

= €344,000.

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Income Statement and Related Information 4 - 33

DERIVATIONS — CPA Adapted

No. Answer Derivation
126. d €100,000 + €75,000 + €110,000 + €90,000 = €375,000.

127. a €140,000 + €170,000 + €90,000 = €400,000.

128. a ₤160,000 + ₤80,000 + ₤110,000 + ₤170,000 = ₤520,000.

129. a ₤150,000 + ₤90,000 = ₤240,000.

130. d €60,000 + €70,000 – €80,000 = €50,000.

131. c €140,000 – €60,000 – €25,000 – €9,000 – €8,000 + €5,000 – €3,000 –

€3,000 = €37,000.

132. a €17,000 × 0.70 = €$11,900.

133. b ₤420,000 – ₤140,000 = ₤280,000.

134. a ₤105,000 + ₤60,000 + ₤90,000 = ₤255,000.

135. b Conceptual.

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4 - 34 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

EXERCISES

Ex. 4-136—Definitions.
Provide clear, concise answers for the following.
1. What are revenues?
2. What are expenses?
3. What are gains?
4. What are losses?
5. When does a discontinued operation occur?
6. Indicate how earnings per share is computed.
7. What is the primary category of prior period adjustments and how are they reported in the
financial statements?

Solution 4-136
1. Revenues are increases in economic benefits during the period that arise from the ordinary
activities of a company.
2. Expenses are decreases in economic benefits during the period that arise from the ordinary
activities of a company.
3. Gains are increases in economic benefits that may or may not arise in the ordinary activities
of a company.
4. Losses are decreases in economic benefits that may or may not arise in the ordinary activities
of a company.
5. A discontinued operation occurs when (a) the results of operations and cash flows of a
component of a company have been eliminated from the ongoing operations, and (b) there is
no significant continuing involvement in that component after the disposal transaction.
6. The computation of earnings per share is: Net income minus preference dividends divided by
the weighted average of ordinary shares outstanding.
7. Prior period adjustments include correction of an error in the financial statements of a prior
period. Prior period adjustments (net of tax) should be debited or credited to the opening
balance of retained earnings.

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Income Statement and Related Information 4 - 35

Ex. 4-137—Terminology.
In the space provided, write the word or phrase that is defined or indicated.

1. Net income minus preference dividends

divided by the weighted average of ordinary
shares outstanding. 1. ________________________________

2. All changes in equity during a period except

those resulting from investments by owners
and distributions to owners. 2. ________________________________

3. A correction of an error is reported as a 3. ________________________________

4. A change from one generally accepted

principle to another. 4. ________________________________

5. The income statement category for a

disposal of a component of a business. 5. ________________________________

6. Relating tax expense to specific items

on the income statement. 6. ________________________________

Solution 4-137
1. Earnings per share.
2. Comprehensive income.
3. Prior period adjustment.
4. Changes in accounting principle.
5. Discontinued operations.
6. Intraperiod tax allocation.

Ex. 4-138—Calculation of net income from the change in equity.

Presented below is certain information pertaining to Edson Company.
Assets, January 1 €240,000
Assets, December 31 230,000
Liabilities, January 1 160,000
Share capital, December 31 80,000
Retained earnings, December 31 31,000
Ordinary shares sold during the year 10,000
Dividends declared during the year 13,000

Compute the net income for the year.

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4 - 36 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Solution 4-138
January 1 December 31
Assets €240,000
Liabilities 160,000
Equity € 80,000 €111,000*

Computation of net income:

Equity December 31 €111,000
Equity January 1 80,000
Increase 31,000
Add: Dividend declared 13,000
Less: Ordinary shares sold (10,000)
Net income € 34,000

*€80,000 + €31,000

Ex. 4-139—Calculation of net income from the change in equity.

Presented below are changes (in thousands) in the account balances of Wenn Company during
the year, except for retained earnings.
Increase Increase
(Decrease) (Decrease)
Cash ¥25,000 Accounts payable ¥34,000
Accounts receivable (net) (13,000) Bonds payable (20,000)
Inventory 52,000 Share capital 72,000
Plant assets (net) 37,000 Share premium 16,000

The only entries in Retained Earnings were for net income and a dividend declaration of $10,000.

Compute the net income for the current year.

Solution 4-139
Computation of net income
Change in assets (¥114,000 – ¥13,000) ¥101,000 Increase
Change in liabilities (¥34,000 – ¥20,000) 14,000 Increase
Change in equity 87,000 Increase
Add: Dividend declared 10,000
Less: Investment by shareholders (88,000)
Net income ¥ 9,000

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Income Statement and Related Information 4 - 37

Ex. 4-140—Income measures.

Presented below is information related to Watt Company in its first year of operation. The
following information is provided at December 31, 2019, the end of its first year.
Sales revenue €420,000
Cost of good sold 210,000
Selling and administrative expenses 75,000
Gain on sale of plant assets 45,000
Unrealized gain on non-trading securities 15,000
Financing costs 10,000
Loss on discontinued operations 20,000
Allocation to non-controlling interest 60,000
Dividends declared and paid 12,000

Compute the following (a) income from operations, (b) net income, (c) net income attributable to
Watt Company shareholders, (d) comprehensive income, and (e) retained earnings balance at
December 31, 2019.

Solution 4-140
Sales revenue......................................................................................................... €420,000
Cost of goods sold.................................................................................................. 210,000
Gross profit............................................................................................................. 210,000
Selling and administrative expenses....................................................................... 75,000
Other income and expenses
Gain on sale of plant assets.......................................................................... 45,000
Income from operations.......................................................................................... 180,000(a)
Financing costs....................................................................................................... 10,000
Income from continued operations.......................................................................... 170,000
Loss on discontinued operations............................................................................ (20,000)
Net income............................................................................................................. 150,000(b)
Allocation to non-controlling interest....................................................................... 60,000
Net income attributable to shareholders................................................................. €90,000(c)
Net income............................................................................................................. €150,000
Unrealized gain on non-trading securities............................................................... 15,000
Comprehensive income.......................................................................................... €165,000(d)
Net income............................................................................................................. €150,000
Dividends declared and paid.................................................................................. 12,000
Retained earning December 31, 2019.................................................................... €138,000(e)

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4 - 38 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Ex. 4-141—Income Computations.

Presented below is financial information related to Finney Company
Revenue €950,000
Income from continuing operations 120,000
Comprehensive income 140,000
Net income 100,000
Income from operations 260,000
Selling and administrative expenses 600,000
Income before income tax 250,000

Compute the following (a) other income and expense, (b) financing costs, (c) income tax,
(d) discontinued operations, and (e) other comprehensive income.

Solution 4-141
a. Other income and expense = €950,000 – €600,000 – €260,000 = €90,000.
b. Financing costs = €260,000 – €250,000 = €10,000.
c. Income tax = €250,000 – €120,000 = €130,000.
d. Discontinued operations = €120,000 – €100,000 = (€20,000).
e. Other Comprehensive income = €140,000 – €100,000 = €40,000.

Ex. 4-142—Income statement classifications.

Indicate the major section or subsection of an income statement in which each of the following
items would usually appear:
a. Advertising
b. Depletion
c. Dividend revenue
d. Freight-in
e. Loss on disposal of a component of the business, net of tax
f. Income taxes on income
g. Interest revenue
h. Purchase discounts
i. Sales discounts
j. Officers' salaries
k. Freight-out

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Income Statement and Related Information 4 - 39

Solution 4-142
a. Selling expense.
b. Cost of goods sold.
c. Other income and expense.
d. Cost of goods sold as an addition to purchases.
e. Discontinued operations.
f. Income taxes; subtracted from income before income taxes in arriving at net income.
g. Other income and expense.
h. Cost of goods sold as a subtraction from purchases.
i. Subtracted from gross revenues.
j. Administrative or general expenses.
k. Selling expense.

Ex. 4-143—Income statement relationships.

Fill in the appropriate blanks for each of the independent situations below.
Company A Company B Company C
Sales revenue (a) ¥_______ ¥343,400 ¥540,000
Beginning inventory 52,600 (d) _______ 90,000
Net purchases 175,300 255,600 (g) _______
Ending inventory 52,200 108,000 63,000
Cost of goods sold (b) _______ (e) _______ 387,000
Gross profit 95,300 88,000 (h) _______
Operating expenses (c) _______ 50,000 48,000
Income before taxes 6,000 (f) _______ (i) _______

Solution 4-143
(a) ¥271,000 (d) ¥107,800 (g) ¥360,000
(b) ¥175,700 (e) ¥255,400 (h) ¥153,000
(c) ¥89,300 (f) ¥38,000 (i) ¥105,000

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4 - 40 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Ex. 4-144— Income statement.

Listed below in scrambled order are 11 income statement categories. Use the numerals 1 through
11 to indicate the order in which these categories should appear on an income statement.
( ) Discontinued operations.
( ) Cost of goods sold.
( ) Other income and expense.
( ) Net income.
( ) Income taxes.
( ) Sales.
( ) Gross profit.
( ) Income from operations.
( ) Income before income taxes.
( ) Selling and administrative expenses.
( ) Income from continuing operations.

Solution 4-144
10, 2, 5, 11, 8, 1, 3, 6, 7, 4, 9

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Income Statement and Related Information 4 - 41

Ex. 4-145—Classification of income statement and retained earnings statement items.

For each of the items listed below, indicate how it should be treated in the financial statements.
Use the following letter code for your selections:
a. Other income and expense item on the income statement
b. Discontinued operations
c. Prior period adjustment

______ 1. The company incurred a loss from impairment of plant assets.

______ 2. Obsolete inventory was written off. This was the first loss of this type in the
company's history.

______ 3. Loss on the disposal of a component of the business.

______ 4. Recognition of income earned last year which was inadvertently omitted from last
year's income statement.

______ 5. The company sold one of its warehouses at a loss.

______ 6. Settlement of litigation with federal government related to income taxes of three
years ago. The company is continually involved in various adjustments with the
federal government related to its taxes.

______ 7. Loss on sale of investments. The company last sold some of its investments two
years ago.

______ 8. The company neglected to record its depreciation in the previous year.

______ 9. Discontinuance of all production in the United States. The manufacturing

operations were relocated in Mexico.

Solution 4-145
1. a 4. c 7. a
2. a 5. a 8. c
3. b 6. a 9. a

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4 - 42 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

PROBLEMS

Pr. 4-146—Income statement.

Presented below is information (in thousands) related to Chen Company.

Retained earnings, December 31, 2018 ¥ 650,000

Sales revenue 1,400,000
Selling and administrative expenses 240,000
Loss on disposal of component (pre-tax) 260,000
Cash dividends declared on ordinary shares 33,600
Cost of goods sold 830,000
Gain resulting from computation error on depreciation charge in 2017 (pre-tax) 520,000
Rent revenue 120,000
Impairment loss 90,000
Interest expense 10,000

Instructions
Prepare in good form an income statement for the year 2019. Assume a 30% tax rate and that
there were 70,000 ordinary shares outstanding during the year.

Solution 4-146
Chen Company
INCOME STATEMENT
For the Year Ended December 31, 2019

Sales revenue ¥1,400,000

Cost of goods sold 830,000
Gross profit 570,000
Selling and administrative expenses (240,000)_
Other income and expense 120,000
Impairment loss (90,000)
Income from operations 360,000
Interest expense 10,000
Income before taxes 350,000
Income taxes (105,000)
Income from continuing operations 245,000
Discontinued operations, net of applicable income taxes of ¥78,000 (182,000)
Net income ¥ 63,000

Per share—
Income from continuing operating ¥ 3.50
Discontinued operations net of tax (2.60)
Net income ¥ 0.90

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Income Statement and Related Information 4 - 43

Pr. 4-147—Income statement form.

Wilcox Corporation had income from continuing operations of €900,000 (after taxes) in 2019. In
addition, the following information has not been considered.

1. A machine was sold for €140,000 cash during the year at a time when its book value was
€110,000. (Depreciation has been properly recorded.) The company often sells machinery of
this type.

2. Wilcox decided to discontinue its stereo division in 2019. During the current year, the loss on
the disposal of this component of the business was €170,000 less applicable taxes.

Instructions
Present in good form the income statement of Wilcox Corporation for 2019 starting with "income
from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 ordinary shares
were outstanding during the year.

Solution 4-147
Wilcox Corporation
Partial Income Statement
For the Year Ended December 31, 2019

Income from continuing operations €921,000*

Discontinued operations
Loss on disposal of a component of a business,
€170,000, less applicable income taxes, €51,000 (119,000)
Net income €802,000
Per share—Income from cont. operations €4.61
Discontinued operations, net of tax (0.60)
Net income €4.01

*Income from cont. operations (unadjusted) €900,000

Gain on sale of machinery (after tax) 21,000
Income from cont. operations (adjusted) €921,000

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4 - 44 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Pr. 4-148—Income statement.

Shown below is an income statement for 2019 that was prepared by a poorly trained bookkeeper
of Howell Corporation.

Howell Corporation
INCOME STATEMENT
December 31, 2019
Sales revenue €895,000
Interest revenue 19,500
Cost of merchandise sold (408,500)
Selling expenses (145,000)
Administrative expense (215,000)
Interest expense (13,000)
Income before special item 133,000
Special item
Loss on disposal of a component of the business (40,000)
Net income tax liability (27,900)
Net income €65,100

Instructions
Prepare an income statement for 2019 for Howell Corporation that is presented in accordance
with IFRS (including format and terminology). Howell Corporation has 50,000 ordinary shares
outstanding and has a 30% income tax rate on all tax related items. Round all earnings per share
figures to the nearest cent.

Solution 4-148
Howell Corporation
INCOME STATEMENT
For the Year Ended December 31, 2019

Sales €895,000
Cost of goods sold 408,500
Gross profit 486,500
Selling expenses €145,000
Administrative expenses 215,000 360,000
Other income: Interest revenue 19,500
Income from operations 146,000
Interest expense 13,000
Income before income taxes 133,000
Income taxes 39,900
Income from continuing operations 93,100
Loss from discontinued operations, net of applicable income tax of €12,000 28,000
Net income €65,100

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Income Statement and Related Information 4 - 45

Solution 4-148 (cont.)

Per share
Income from continuing operations €1.86
Discontinued operations loss net of tax (0.56)
Net income €1.30

Pr. 4-149—Income statement.

Presented below is an income statement for Kinder Company for the year ended December 31,
2019.
Kinder Company
Income Statement
For the Year Ended December 31, 2019

Net sales ₤850,000

Costs and expenses:
Cost of goods sold 640,000
Selling, general, and administrative expenses 70,000
Other, net 20,000 730,000
Income before income taxes 120,000
Income taxes 36,000
Net income ₤ 84,000

Additional information:
1. "Selling, general, and administrative expenses" included a charge of ₤7,000 for impairment of
intangibles.
2. "Other, net" consisted of interest expense, ₤5,000, and a discontinued operations loss of
₤15,000 before taxes. If the loss had not occurred, income taxes for 2019 would have been
₤40,500 instead of ₤36,000.
3. Kinder had 20,000 ordinary shares outstanding during 2019.

Instructions
Prepare a corrected income statement, including the appropriate per share disclosures.

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4 - 46 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Solution 4-149
Kinder Company
Income Statement
For the Year Ended December 31, 2019

Net sales ₤850,000

Cost of goods sold 640,000
Gross profit ₤210,000
Selling, general, and administrative expenses 63,000
Other income and expense
Loss on impairment 7,000
Income from operations 140,000
Interest expense 5,000
Income before taxes 135,000
Income taxes 40,500
Income from continuing operations 94,500
Discontinued operations
Loss on disposal of component 15,000
Less applicable taxes 4,500 10,500
Net income ₤ 84,000

Per share—
Income from continuing operations ₤4.73
Discontinued operations, net of tax (0.53)
Net income ₤4.20

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Income Statement and Related Information 4 - 47

Pr. 4-150—Income statement and retained earnings statement.

Wang Corporation's capital structure consists of 40,000 ordinary shares. At December 31, 2019
an analysis of the accounts and discussions with company officials revealed the following
information:

Sales ¥1,050,000
Purchase discounts 18,000
Purchases 642,000
Loss on discontinued operations (net of tax) 28,000
Selling expenses 128,000
Cash 60,000
Accounts receivable 90,000
Share capital 200,000
Accumulated depreciation 180,000
Dividend revenue 8,000
Inventory, January 1, 2019 152,000
Inventory, December 31, 2019 125,000
Unearned service revenue 4,400
Accrued interest payable 1,000
Land 370,000
Patents 100,000
Retained earnings, January 1, 2019 290,000
Interest expense 17,000
General and administrative expenses 150,000
Dividends declared 29,000
Allowance for doubtful accounts 5,000
Notes payable (maturity 7/1/22) 200,000
Machinery and equipment 450,000
Materials and supplies 40,000
Accounts payable 60,000

The amount of income taxes applicable to ordinary income was ¥33,600, excluding the tax effect
of the discontinued operations loss which amounted to ¥12,000.

Instructions
(a) Prepare an income statement.
(b) Prepare a retained earnings statement.

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4 - 48 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Solution 4-150
WANG CORPORATION
Income Statement
For the Year Ended December 31, 2019

Sales ¥1,050,000
Cost of goods sold:
Merchandise inventory, Jan. 1 ¥152,000
Purchases ¥642,000
Less purchase discounts 18,000
Net purchases 624,000
Merchandise available for sale 776,000
Less merchandise inv., Dec. 31 125,000
Cost of goods sold 651,000

Gross profit 399,000

Selling expenses 128,000
General and administrative expenses 150,000 278,000
Other income and expense:
Dividend revenue 8,000
Income from operations 129,000
Interest expense 17,000
Income before income taxes 112,000
Income taxes 33,600
Income from continuing operations 78,400
Discontinued operations
Loss on disposal, less applicable taxes of $12,000 28,000
Net income ¥ 50,400

Per share of share capital—

Income from continuing operations ¥1.96
Discontinued operations, (0.70)
Net income ¥1.26

WANG CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2019

Retained earnings, January 1, 2019 ¥290,000

Add: Net income ¥50,400
Deduct: Dividends declared 29,000 21,400
Retained earnings, December 31, 2019 ¥311,400

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Income Statement and Related Information 4 - 49

Pr. 4-151—Irregular items and financial statements.

The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the
appropriate accounting treatment of the six items listed below during the fiscal year ending
December 31, 2019. Assume a tax rate of 40 percent.

1. The corporation disposed of its sporting goods division during 2019. This disposal meets
the criteria for discontinued operations. The division correctly calculated income from
operating this division of €150,000 before taxes and a loss of €20,000 before taxes on the
disposal of the division. All of these events occurred in 2019 and have not been recorded.
2. The company recorded advances of €15,000 to employees made December 31, 2019 as
Salaries and Wages Expense.
3. Dividends of $10,000 during 2019 were recorded as an operating expense.
4. In 2019, Bakersfield changed its method of accounting for inventory from the first-in first-
out method to the average cost method. Inventory in 2019 was correctly recorded using
the average cost method. The new inventory method would have resulted in an additional
€125,000 of cost of goods sold (before taxes) being reported on prior years' income
statement.
5. Office equipment purchased January 1, 2019 for €60,000 was incorrectly charged to
Supplies Expense at the time of purchase. The office equipment has an estimated three-
year service life with no expected residual value. Bakersfield uses the straight-line method
to depreciate office equipment for financial reporting purposes. This error has not been
corrected.
6. On January 1, 2015, Bakersfield bought a building that cost €85,000, had an estimated
useful life of ten years, and had a residual value of €5,000. Bakersfield uses the
straight-line depreciation method to depreciate the building. In 2019, it was estimated that
the remaining useful life was eight years and the residual value was zero. Depreciation
expense reported on the 2019 income statement was correctly calculated based on the
new estimates. No adjustment for prior years' depreciation estimates was made.
Part A. For each item, indicate corrections to income from continuing operations before
taxes, if any. Denote any negative numbers by using brackets < >.

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4 - 50 Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

Solution 4-151

Number Item Description Increase <Decrease> to

Income from Continuing
Operations
1. Discontinued Items reported after Income from No Effect
Continuing Operations
2. Correct with Dr: Advances to Employees €15,000
Cr: Salaries and Wages Expense
3. Dividends are not reported on the Income €10,000
Statement; should be on Statement of R/E.
4. Change in inventory method: Current year No Effect
reported correctly on income statement, need to
adjust beginning R/E.
5. To correct, need to put all €60,000 into €40,000
Equipment account and take out of Supplies
Expense account. Also take depreciation of
€20,000 for the year. Net effect is to increase
income by €40,000.
6. Current year is correct. Change in estimate does No Effect
not need retroactive action.

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Income Statement and Related Information 4 - 51

Part B. At January 1, 2019, Bakersfield, Inc.'s retained earnings balance was €200,000.
Assume that income before income tax and after correctly considering any of the six
additional items in Part A was €1,000,000. Prepare the income statement and retained
earnings statement. Denote negative numbers by using brackets < >. Do not
disclose earnings per share data.

BAKERSFIELD INCORPORATED
Partial Income Statement
For the Year Ending December 31, 2019
Income before income tax €1,000,000
Income tax (€1,000,000 × 40%) <400,000>
Income from continuing operations 600,000
Discontinued operations
Income from discontinued operations net of tax 90,000
(€150,000 × 60%)
Loss on disposal of discontinued operation net of tax <12,000>
(€20,000 × 60%)
Net income €678,000

BAKERSFIELD INCORPORATED
Retained Earnings Statement
For the Year Ending December 31, 2019
Beginning Retained earnings as of January 1, 2019 €200,000
Adjustment for change in inventory method <75,000>
(€125,000 × 60%)
Beginning Retained earnings as adjusted 125,000
Add: Net Income 678,000
Less: Dividends <10,000>
Ending Retained earnings €793,000

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