Question : 187.Prepare a corporate income statement in good form from the : 1244213

187.Prepare a corporate income statement in good form from the following year-end balances as of December 31, 20×9, from the general ledger of Hammond Corporation. Assume 10,000 shares of common stock are outstanding for the year.

Administrative Expenses

$  24,000

Cost of Goods Sold

120,000

Discontinued Operations

(1) Income from Operations of Discontinued Segment

30,000

(net of taxes, $10,000)

(2) Loss on Disposal of Segment (net of taxes, $5,000)

15,000

Extraordinary Loss from Fire (net of taxes, $1,250)

5,000

Income Taxes Applicable to Continuing Operations

12,000

Sales

240,000

Selling Expenses

72,000

188.At the beginning of 20×6, Kurt Franz retired as president and principal stockholder in KRF Corporation, a successful producer of personal computer equipment. As an incentive to the new management, Franz supported the board of directors’ new executive compensation plan, which provides cash bonuses to key executives for years in which the company’s earnings per share equal or exceed the current dividends per share of $2.00, plus a $0.20 per share increase in dividends for each future year. Thus, for management to receive the bonuses, the company must earn per-share income of $2.00 the first year, $2.20 the second, $2.40 the third, and so forth. Since Franz owns 500,000 of the 1,000,000 common shares outstanding, the dividend income will provide for his retirement years. He is also protected against inflation by the regular increase in dividends. Earnings and dividends per share for the first three years of operation under the new management were as follows:

2008

2007

2006

Earnings per share

$2.50

$2.50

$2.50

Dividends per share

2.40

2.20

2.00

During this time, management earned bonuses totaling more than $1 million under the compensation plan. Franz, who had taken no active part on the board of directors, began to worry about the unchanging level of earnings and decided to study the company’s annual report more carefully. The notes to the annual report revealed the following information:

1. Management changed from the LIFO inventory method to the FIFO method in 20×6. The

    effect of the change was to decrease cost of goods sold by $200,000 in 20×6, $300,000 in

    20×7, and $400,000 in 20×8.

2. Management changed from the double-declining-balance accelerated depreciation method

    to the straight-line method in 20×7. The effect of this change was to decrease depreciation

    by $400,000 in 20×7 and by $500,000 in 20×8.

3. In 20×8, management increased the estimated useful life of intangible assets from five to

    ten years. The effect of this change was to decrease amortization expense by $100,000 in

    20×8.

a. Compute earnings per share for each year according to the accounting methods in use at

     the beginning of 20×6. (Use common shares outstanding.)

b. Have the executives earned their bonuses? What serious effect has the compensation

     package apparently had on the net assets of KRF Corporation? How could Franz have

     protected himself from what happened?