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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Anoka Company reported the following selected items in the shareholders’ equity section of its balance sheet on December 31, 2019, and 2020:

Chapter 16, Problem 19P, Anoka Company reported the following selected items in the shareholders equity section of its , example  1

In addition, it listed the following selected pretax items as a December 31, 2019 and 2020:

Chapter 16, Problem 19P, Anoka Company reported the following selected items in the shareholders equity section of its , example  2

The preferred shares were outstanding during all of 2019 and 2020; annual dividends were declared and paid in each year. During 2019, 2,000 common shares were sold for cash on October 4. During 2020, a 20% stock dividend was declared and issued in early May. At the end of 2019 and 2020, the common stock was selling for $25.75 and $32.20, respectively. The company is subject to a 30% income tax rate.

Required:

  1. 1. Prepare the comparative 2019 and 2020 income statements (multiple-step), and the related note that would appear in Anoka’s 2020 annual report.
  2. 2. Next Level Compute the price/earnings ratio for 2020. How does this compare to 2019? Why is it different?

1.

To determine

Prepare the comparative income statement for the year 2019 and 2020 and also provide the notes related to the income statement that would appear in the annual report of Company R.

Explanation

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

Prepare the comparative income statement for Company A.

Company A
Comparative income statement
for the years ended December 31,2019 and 2020
Particulars2020 in $2019 in $
Sales140,000124,300
Cost of goods sold(80,000)(75,000)
Gross profit60,00049,300
Operating expenses(20,000)(18,000)
Income before discontinued operations40,00031,300
Income tax expense (30%)(12,000)(9,390)
Income before discontinued operations28,00021,910
Income from discounted operations (net of $1,800 income tax expense) 4,200
Loss from discounted operations (net of $2,700 income tax credit)(6,300)-
Net income21,70026,110
Basic earnings per share:  
      Income before extraordinary item2.922.79
      Discontinued operations 0.64
      Discontinued operations(0.75)-
       Net income2.173.43

(Table 1)

Notes to the financial statement:

Note A: for the purpose of comparative statement, retroactive recognition back to 2019 is given to the 20% stock dividend issued in 2020. The preferred dividend amount $3,500 [50,000×7%] must be deducted from the income before the discounted operations for the year 2019 and 2020. The net income of $24,500 and $18,400 for the year 2020 and 2019 after deduction of preferred dividend must be divided with the number of shares outstanding in the common stock 8,400 (2) shares for the year 2020 and 6,600 (1) shares for the year 2020. The earnings per share obtained for the income from operations for the year 2019 and 2020 will amount to $2.92 and $2.79. The basic earnings per share for the discounted operations of $ 0.64 is obtained by dividing $4,200 with 6,600 and the loss form the discontinued operations (0.75) is obtained by dividing $6,300 with 8,400 shares outstanding

2.

To determine

Calculate and compare the price/ earnings ratio for the 2019 and 2020.

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