Short Problems
1.Wellman Inc., a computer manufacturer located in Texas, lost an uninsured building due to the infrequent and unusual occurrence of a hurricane. The building has a balance sheet value of $20,000 and will cost $165,000 to rebuild. Wellman’s income tax rate is 40%. Calculate the amount of any extraordinary loss that should be reported on Wellman’s income statement. Prepare a partial income statement that shows how the item will be presented.
2.The following information was taken from the 2010 financial records of Hopewell Company.
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Debit
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Credit
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Operating revenues
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187,000
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Operating expenses
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132,500
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Gain on sale of short-term investments
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15,200
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Loss on sale of business segment
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21,000
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Income earned on disposed business segment
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3,000
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Extraordinary loss
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5,000
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Income due to change in accounting principle
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12,500
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Retained earnings (beginning balance)
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72,000
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Dividends declared
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18,000
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The company’s income tax rate is 35 percent, and the items above are treated identically for the financial reporting and tax purposes.
REQUIRED:
Prepare an income statement using this information.
3.Canter Company operates a boat rental service in North Carolina. The company was involved in the following transactions and events during 2009:
1. The supplies, gasoline, and other maintenance item costs incurred associated with the rentals are $420,000.
2. Provided rental boats to customers during 2009 for total revenue of $880,000.
3. Damage by anearthquake to one of Canter’s uninsured rental centers in Georgia, during 2009 was $440,000. Earthquakes have never occurred here before.
4. Sued by a rental customer that got his head caught in the ladder of a rental boat. The customer will probably win the suit that is estimated at $80,000. Lawsuits are common in the rental industry.
5. Switched from double-declining-balance to straight-line depreciation. Effect was to decrease the accumulated depreciation account by $58,000.
6. Declared and paid $25,000 in dividends.
For each transaction, state in which section of the income statement it should be reported and give the dollar amount that should be reported. State whether each reporting amount is added or subtracted on the income statement and if the specific line item on the income statement is reported net of taxes. Canter’s income tax rate is 30%.