51.Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company’s dividends in any one year. The 2015 income statement data for the company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of income before change in accounting principle?
a. $55,000
b. $60,000
c. $65,700
d. $42,160
Solution:
Income before change in accounting method
Maximum Dividend=20% ? $210,800
=$42,160
52.Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company’s dividends in any one year. The 2015 income statement data for the company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of income before extraordinary items and change in accounting principle?
a. $37,760
b. $60,000
c. $65,700
d. $52,700
Solution:
Income before extraordinary items
Maximum Dividend=20% ? $188,800
=$37,760
53.Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company’s dividends in any one year. The 2015 income statement data for the company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of net operating income?
a. $44,000
b. $60,000
c. $47,200
d. $52,700
Solution:
Net operating income
Maximum Dividend=20% ? $220,000
=$44,000
54.Gleeson Industries consists of four separate divisions: compressed wood products, chemicals, stone products, and plastics. On March 15, 2015, Gleeson sold the chemicals division for $625,000 cash.Financial information related to the chemicals division follows:
Period from 1/1/15to 3/15/15
Sales
$175,000
Operating expenses
160,000
Net operating income (loss)
$15,000
As of 3/15/15
Assets
$1,850,000
Liabilities
1,400,000
The journal entry to record the sale of the chemicals division will include:
a. a debit to Loss on Disposal of Business Segment for $175,000.
b. a debit to Assets for $1,850,000.
c. a debit to Extraordinary Gain for $175,000.
d. a credit to Gain on Disposal of Business Segment for $175,000.
Solution:
Cash ……………………………………625,000
Liabilities ………………………………………. 1,400,000
Assets ……………………………………….. 1,850,000
Gain on Disposal of Business Segment …………………….. 175,000
55.Gleeson Industries consists of four separate divisions: compressed wood products, chemicals, stone products, and plastics. On March 15, 2015, Gleeson sold the chemicals division for $625,000 cash. Financial information related to the chemicals division follows:
Period from 1/1/15to 3/15/15
Sales
$175,000
Operating expenses
160,000
Net operating income (loss)
$15,000
As of 3/15/15
Assets
$1,850,000
Liabilities
1,400,000
If the income tax rate for the company is 35%, what amount of income tax liability on the disposal of the business segment will be recognized?
a. $218,750
b. $61,250
c. $5,250
d. $157,500
Solution:
Cash ……………………………………625,000
Liabilities ………………………………………. 1,400,000
Assets ……………………………………….. 1,850,000
Gain on Disposal of Business Segment …………………….. 175,000
Sold business segment.
Gain on Disposal of Business Segment …………………….. 61,250*
Income Tax Liability (+L)…………………………….. 61,250
Recognized income tax liability on disposal of business segment.
$61,250 = Gain on disposal of $175,000 ? Tax rate of 35%
56.The management of Hammer Enterprises shares in a bonus that is determined and paid at the end of each year. The amount of the bonus is based on 12% of net income from continuing operations after tax. The bonus is not used in the calculation of income from continuing operations. During 2015, Hammer was sued and was ordered to pay $480,000 over and above the amount covered by insurance. The loss is tax deductible and the company’s tax rate is 35%. The company was last involved in a lawsuit five years ago. Net income from continuing operations before tax for 2015, excluding the lawsuit loss was $750,000.
What would management’s 2015 bonus be if the lawsuit is considered unusual by not infrequent?
a. $175,500
b. $32,400
c. $21,060
d. $20,160
Solution:
If a lawsuit is considered unusual but not infrequent, then it would be classified under other expenses and losses. Consequently, the loss from the lawsuit would be used to compute net income from continuing operations.
Bonus=12% ? [($750,000 – $480,000) ? (1 – Tax Rate)]
=12% ? [$270,000 ? (1 – 35%)]
=$21,060
57.The management of Hammer Enterprises shares in a bonus that is determined and paid at the end of each year. The amount of the bonus is based on 12% of net income from continuing operations. The bonus is not used in the calculation of income from continuing operations. During 2015, Hammer was sued and was ordered to pay $480,000 over and above the amount covered by insurance. The loss is tax deductible and the company’s tax rate is 35%. The company was last involved in a lawsuit five years ago. Net income from continuing operations (before tax for 2015, excluding the lawsuit loss was $750,000.
What would management’s 2015 bonus be if the lawsuit is considered extraordinary?
a. $90,000
b. $57,600
c. $32,400
d. $58,500
Solution:
If the loss from the lawsuit is considered extraordinary, then the loss would not be used to compute net income from continuing operations.
Bonus=12% ? [$750,000 ? (1 – Tax Rate)]
=12% ? [$750,000 ? (1 – 35%)]
=$58,500
58.The following income statement was reported by Snappy Seacraft Company for the year ending December 31, 2015:
Sales
$85,000
Rent revenue
23,000
Interest income
7,000
Total revenues
$115,000
Cost of goods sold
$52,000
Operating expenses
24,000
Interest expense
12,000
Loss on sale of fixed asset
6,000
Total expenses
94,000
Income from continuing operations (before tax)
$21,000
Less: Income tax
10,000
Income from continuing operations
$11,000
Income from disposed segment (net of tax)
3,000
Gain on sale of disposed segment (net of tax)
2,000
Income before extraordinary items
$16,000
Extraordinary loss (net of tax)
7,000
Income before change in accounting principle
$9,000
Income due to change in accounting principle (net of tax)
6,000
Net income
$15,000
Assume Snappy has an average of 15,000 shares of common stock outstanding during 2015. Based on this information, what amount of earnings per share would be reported on the income statement as the disposal of the business segment?
a. $0.33
b. $0.20
c. $1.00
d. $0.73
Solution:
Income from continuing operations…………….$ 0.73
Disposal of business segment*………………. 0.33
Extraordinary loss………………………. (0.46)
Changes in accounting method………………. 0.40
Net earnings per share…………………….$ 1.00
*The EPS disclosure for the disposal of the business segment includes both the income from the disposed segment and the gain on the sale of the disposed segment.
59.The following income statement was reported by Snappy Seacraft Company for the year ending December 31, 2015:
Sales
$85,000
Rent revenue
23,000
Interest income
7,000
Total revenues
$115,000
Cost of goods sold
$52,000
Operating expenses
24,000
Interest expense
12,000
Loss on sale of fixed asset
6,000
Total expenses
94,000
Income from continuing operations (before tax)
$21,000
Less: Income tax
10,000
Income from continuing operations
$11,000
Income from disposed segment (net of tax)
3,000
Gain on sale of disposed segment (net of tax)
2,000
Income before extraordinary items
$16,000
Extraordinary loss (net of tax)
7,000
Income before change in accounting principle
$9,000
Income due to change in accounting principle (net of tax)
6,000
Net income
$15,000
Assume Snappy has an average of 25,000 shares of common stock outstanding during 2015. Based on this information, what amount of earnings per share would be reported on the income statement as the disposal of the business segment?
a. $0.12
b. $0.20
c. $0.08
d. $0.60
Solution:
Income from continuing operations…………….$ 0.44
Disposal of business segment*………………. 0.20
Extraordinary loss………………………. (0.28)
Changes in accounting method………………. 0.24
Net earnings per share…………………….$ 0.60
*The EPS disclosure for the disposal of the business segment includes both the income from the disposed segment and the gain on the sale of the disposed segment.
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