Chapter 1, Problem 4ATC

a.

To determine

Compute the percentage of growth in net income from 2016 to 2017. Describe whether the stockholder’s expect a similar increase between 2017 and 2018.

Answer to Problem 4ATC

The percentage of growth in net income for 2016 and 2017 is 65% (1). However company could not expect this rate (in future) for the years 2017 and 2018, as 69% $\left(\text{\$72,000}÷\text{\$104,000}\right)$ of the growth is from the amount of lottery. If the company would have not included the amount of lottery, then the actual increase in net income would be 20% (2). Hence, the stockholder’s expect an increase in net income of 20%, if the company continues to grow at the current rate.

Explanation of Solution

Working notes:

Calculate the net income percentage for 2016 and 2017:

$\begin{array}{c}\begin{array}{l}\text{Net Income}\\ \text{Percentage}\end{array}\}=\frac{\text{Net Income of 2017}-\text{Net Income of 2016}}{\text{Net Income of}\text{2016}}\times 100\\ =\frac{\$264,000-\$160,000}{\$160,000}\times 100\\ =\$65\%\end{array}$ (1)

Calculate the actual growth of net income:

$\begin{array}{c}\begin{array}{l}\text{Net Income}\\ \text{Percentage}\end{array}\}=\frac{\left[\begin{array}{l}\text{Net Income of 2017}-\\ \text{Lottery amount}\end{array}\right]-\text{Net Income of 2016}}{\text{Net Income of 2016}}\times 100\\ =\frac{\left[\$264,000-\$72,000\right]-\$160,000}{\$160,000}\times 100\\ =20\%\end{array}$ (2)

b.

To determine

Explain how the money (collected for cash from earnings by Company SHB) was spent in 2017.

Explanation of Solution

It is assumed that Company SHB used its $264,000 amount of cash for paying off its liabilities as the total liabilities are reduced by $264,000. There was no change in the asset and common stock.

c.

To determine

Calculate the expected amount of income from continuing operations that could be reported on the income statement of Year 2018.

Answer to Problem 4ATC

The owner can expect a net income of $158,700 (3) during the year 2018 since, the actual percentage of net income is increased by 20% (2).

Explanation of Solution

Working notes:

Calculate net income for 2018:

$\begin{array}{c}\begin{array}{l}\text{Net Income}\\ \text{for 2018}\end{array}\}=\left[\begin{array}{l}\text{Net Income of 2017}\\ -\text{Lottery amount}\end{array}\right]\times 115\%\\ =\left[\$264,000-\$72,000\right]\times 120\%\\ =\$230,400\end{array}$ (3)

d.

To determine

Prepare an income statement and balance sheet as of December 31, 2018.

Answer to Problem 4ATC

Prepare an income statement as of December 31, 2018 as follows:

Company SHB
Income statement
For the year ended December 31, 2018
Particulars	Amount in $
Revenues (4)	1,152,000
Less: Operating expenses (5)	(921,600)
Net income from continuing operations	230,400
Less: Extraordinary Loss	(60,000)
Net income	170,400

Table (1)

Prepare the balance sheet as of December 31, 2018 as follows:

Company B
Balance Sheet
As of December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets		1,331,400
Liabilities		0
Stockholders’ Equity
Common Stock	501,000
Retained Earnings (6)	830,400
Total Stockholders’ Equity		1,331,400
Total Liabilities and Stockholders’ Equity		1,331,400

Table (2)

Explanation of Solution

Income statement:

Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

Balance is the financial statement that reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Working notes:

Calculate the amount of revenues for 2018:

$\begin{array}{c}\text{Revenues for 2018}=\text{120\% on 2016}\text{revenues}\\ =120\%\times 960,000\\ =\$1,152,000\end{array}$ (4)

Calculate the amount of operating expenses for 2018:

$\begin{array}{c}\begin{array}{l}\text{Operating expenses}\\ \text{for Year 3}\end{array}\}=\text{120\% on 2017 Operating expesnes}\\ =120\%\times \$768,000\\ =\$921,600\end{array}$ (5)

Calculate the amount of retained earnings for 2018:

$\begin{array}{c}\text{Retained earnings}=\text{Retained earnings}\text{of}\text{2017}+\text{Net income (Table(1))}\\ =\text{\$660,000}+\$170,400\\ =\text{\$830,400}\end{array}$ (6)