Question : 51.Sunrise Designs maintains a credit line with Ohio River Bank : 1241759

 

 

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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