Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 12 Special Income and Investment Reporting Issues 563

Audio Affection, Inc., sells automotive and home stereo equipment. It has 50,000 shares of $100

par common stock outstanding and 10,000 shares of $2, $100 par cumulative preferred stock out-

standing as of December 31, 2006. List the errors you find in the following income statement for

the year ended December 31, 2006.

Net sales $9,450,000

Cost of merchandise sold 7,100,000

Gross profit $2,350,000

Operating expenses:

Selling expenses $820,000

Administrative expenses 320,000 1,140,000

Income from continuing operations before income tax $1,210,000

Income tax expense 420,000

Income from continuing operations $ 790,000

Cumulative effect on prior years’ income (decrease)

of changing to a different depreciation method

(net of applicable income tax of $86,000) (204,000)

Fixed asset impairment (30,000)

Income before condemnation of land, restructuring

charge, and discontinued operations $ 556,000

Extraordinary items:

Gain on condemnation of land (net of applicable

income tax of $80,000) 120,000

Restructuring charge (net of applicable income tax

of $25,500) (59,500)

Loss on discontinued operations (net of applicable

income tax of $76,000) (184,000)

Net income $ 432,500

Earnings per common share:

Income from continuing operations $ 15.80

Cumulative effect on prior years’ income (decrease)

of changing to a different depreciation method (4.08)

Fixed asset impairment (0.60)

Income before extraordinary item and discontinued

operations $ 11.12

Extraordinary items:

Gain on condemnation of land 2.40

Restructuring charge (1.19)

Loss on discontinued operations (3.68)

Net income $ 8.65

Audio Affection, Inc.

Income Statement

For the Year Ended December 31, 2006

Exercise 12-11

Income statement

Goals1, 2

Correct EPS for net income,
$8.25

Glow-Rite Lighting Company had earnings for 2006 of $740,000. The company had 125,000

shares of common stock outstanding during the year. In addition, the company issued 50,000

shares of $100 par value preferred stock on January 5, 2006. The preferred stock has a dividend

of $6 per share. There were no transactions in either common or preferred stock during 2006.

Determine the basic earnings per share for Glow-Rite.

Exercise 12-12

Earnings per share with
preferred stock

Goal 3