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 expenses51,700
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.
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

Administrative expenses

$177,900

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.
(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.......................................................................................
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...................................................................................................

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

550,000
187,000
363,000
$75,000
25,500

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

Per share of common stock:

Income from continuing operations ($363,000 100,000).......................................
Loss on discontinued operations, net of tax.........................................................

49,500
313,500

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

$3.63
(.49)

Income before extraordinary items ($313,500 100,000)........................................

Extraordinary gain, net of tax...............................................................................
Extraordinary loss, net of tax................................................................................
Net income ($336,600 100,000)..........................................................................
(b)

3.14
.63
(.40)
$3.37

Roland Carlson Inc.

Retained Earnings Statement
For the Year Ended December 31, 2007

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

Add: Net income.................................................................................................................
Less: Dividends declared...................................................................................................
Retained earnings, December 31.......................................................................................

(c)

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

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 600,000 165,0000
Billings to date300,000 900,000 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 completed-

contract method is used.

(a)

Gross profit recognized in:

2007

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

2008

$1,500,000
$400,000
600,000

2009
$1,500,000

$935,000
1,000,000

165,000

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

1,100,000

1,070,000

500,000

400,000

430,000

40%*

85%**

100%

200,000

340,000

430,000

200,000

340,000

$ 200,000

$ 140,000

90,000

**$400,000 $1,000,000
**$935,000 $1,100,000
(b)

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

535,000

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

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

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

535,000

600,000

540,000

675,000*

(c)

Gross profit recognized in:

2007
$ 0

Gross profit

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)

(b)

Contract billings to date

Less: Accounts receivable 12/31/07
Portion of contract billings collected
$18,200
$65,000

= 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.)

$61,500
21,500
$40,000

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

$ 150,000
1,350,000
$1,500,000

Percent complete ($150,000 $1,500,000)

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

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

Total loss

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)

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

$2,100,000
0
2,100,000
1,950,000
$ (150,000

Contract price
Total loss
Total loss
Less: Loss recognized in 2008
Gross profit recognized in 2007
Loss recognized in 2009
(b)

$ (150,000)
$95,000
(45,000)

Computation of Recognizable Profit/Loss

Completed-Contract Method
2007NONE

(50,000
$ (100,000

2008
Costs to date (12/31/08)
Estimated costs to complete
Estimated total costs
Deduct contract price
Loss recognized in 2008

$1,200,000
800,000
2,000,000
1,950,000
$ (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)