Chapter 5, Problem 9P

To determine

Prepare a corrected comparative income statement for the years 2017 and 2016 of Company T.

Explanation of Solution

Horizontal analysis of financial statements: In horizontal analysis of financial statement, the amount of each item of the current period’s financial statement is compared with the previous period’s financial statement. The amount of each item increased or decreased in the current financial statement, and its respective percentage can be computed by taking the previous period statement as the base. This analysis is also known as trend analysis. The horizontal analysis percentage is calculated by using the given formula:

$\begin{array}{l}\text{Horizontal analysis}\\ \text{ percentage}\end{array}\}=\frac{\text{Current year}-\text{Previous year}}{\text{Base year }}\times 100$

Prepare a corrected comparative income statement for the years 2017 and 2016 of Company T.

Company T
Comparative Income Statement
For the Year Ended December 31
Particulars	2017	2016
	Amount ($)	Amount ($)
Sales	(1) $2,900,000	(2) $3,900,000
Cost of goods sold	(3) ($980,000)	(4) ($2,310,000)
Gross profit	$1,920,000	$1,590,000
Operating expenses	(5) ($1,020,000)	(6) ($1,390,000)
Operating income	$900,000	$200,000
Other item:
Loss from obsolescence inventory	($150,000)	$0
Unusual loss	$0	($60,000)
Unusual gain		$250,000
Miscellaneous	(7) ($50,000)	(8) ($90,000)
Pretax income from continuing operation	$700,000	$300,000
Less: Income tax expense	($210,000)	($90,000)
Result from discontinuing operations:
Income (loss) from operations of discontinued division	(9) ($210,000)	(10) $210,000
Loss on write-down of held-for-sale backscratcher	(11) ($112,000)	$0
Net income	$168,000	$420,000

Table (1)

Working note (1):

Calculate the amount of sales for 2017:

$\begin{array}{c}\text{Sales for 2017 = }\left(\begin{array}{l}\text{Sales for 2017 in income statement}-\\ \text{Sales in June operating results}-\\ \text{Sales for December operating results}\end{array}\right)\\ =\$3,500,000-\$400,000-\$200,000\\ =\$2,900,000\end{array}$

Working note (2):

Calculate the amount of sales for 2016:

$\begin{array}{c}\text{Sales for 2016 = }\left(\begin{array}{l}\text{Sales for 2016 in income statement}-\\ \text{Sales for 2016}\text{in operating results}\end{array}\right)\\ =\$4,600,000-\$700,000\\ =\$3,900,000\end{array}$

Working note (3):

Calculate the amount of cost of goods sold for 2017:

$\begin{array}{c}\text{Cost of goods sold for 2017 = }\left(\begin{array}{l}\text{Cost of goods sold for 2017 in income statement}-\\ \text{Cost of goods sold in June operating results}-\\ \text{Cost of goods sold for December operating results}\end{array}\right)\\ =\$1,600,000-\$320,000-\$300,000\\ =\$980,000\end{array}$

Working note (4):

Calculate the amount of cost of goods sold for 2016:

$\begin{array}{c}\text{Cost of goods sold}\text{for 2016 = }\left(\begin{array}{l}\text{Cost of goods sold for 2016 in income statement}-\\ \text{Cost of goods sold for 2016}\text{in operating results}\end{array}\right)\\ =\$2,600,000-\$290,000\\ =\$2,310,000\end{array}$

Working note (5):

Calculate the amount of operating expenses for 2017:

$\begin{array}{c}\text{Operating expenses for 2017 = }\left(\begin{array}{l}\text{Operating expenses for 2017 in income statement}-\\ \text{Operating expenses in June operating results}-\\ \text{Operating expenses for December operating results}\end{array}\right)\\ =\$1,300,000-\$180,000-\$100,000\\ =\$1,020,000\end{array}$

Working note (6):

Calculate the amount of operating expenses for 2016:

$\begin{array}{c}\text{Operating expenses}\text{for 2016}=\left(\begin{array}{l}\text{Operating expenses for 2016 in income statement}-\\ \text{Operating expenses for 2016}\text{in operating results}\end{array}\right)\\ =\$1,500,000-\$110,000\\ =\$1,390,000\end{array}$

Working note (7):

Calculate the amount of miscellaneous expenses for 2017:

$\begin{array}{c}\text{Miscellaneous expenses}\text{for 2017 = Other item}+\text{Loss in 2017 }\\ =\left(-\$200,000+\$150,000\right)\\ =\left(\$50,000\right)\end{array}$

Working note (8):

Calculate the amount of miscellaneous expenses for 2016:

$\begin{array}{c}\text{Miscellaneous expenses}\text{for 2016 = }\left[\left(\begin{array}{l}\text{Other item}+\\ \text{Loss in 2016}\end{array}\right)-\text{Gain in 2016}\right]\\ =\left[\begin{array}{l}\left(\$100,000+\$60,000\right)\\ -\$250,000\end{array}\right]\\ =\left(\$90,000\right)\end{array}$

Working note (9):

Calculate income/loss from operations of discontinued division for 2017:

$\begin{array}{c}\begin{array}{l}\text{Income/loss from operations of }\\ \text{discontinued division for 2017}\end{array}\}\text{=}\{\begin{array}{l}\left[\begin{array}{l}\left(\begin{array}{l}\text{Sales in June operating results+ }\\ \text{Sales for December operating results}\end{array}\right)-\\ \left(\begin{array}{l}\text{Cost of goods sold in June }\\ \text{operating results+}\\ \text{Cost of goods sold for }\\ \text{December operating results}\end{array}\right)\\ -\left(\begin{array}{l}\text{Operating expenses in June}\\ \text{ operating results}-\\ \text{Operating expenses for December}\\ \text{ operating results}\end{array}\right)\end{array}\right]\\ \times 70\%\end{array}\}\\ =\{\left[\begin{array}{l}\left(\$400,000+\$200,000\right)-\\ \left(\$320,000+\$300,000\right)\\ -\left(\$180,000+\$100,000\right)\times 70\%\end{array}\right]\}\\ =\{\begin{array}{l}\left(\$600,000-\$620,000-\$280,000\right)\\ \times 70\%\end{array}\}\\ =\left(\$210,000\right)\end{array}$

Working note (10):

Calculate income/loss from operations of discontinued division for 2016:

$\begin{array}{c}\begin{array}{l}\text{Income/loss from}\\ \text{operations of discontinued }\\ \text{division for 2016 }\end{array}\}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Sales for 2016}\text{in operating results}-\\ \text{Cost of goods sold for 2016}\text{in operating results}\\ -\text{Operating expenses for 2016}\text{in operating results}\end{array}\right)\\ \times 70\%\end{array}\right]\\ =\left[\begin{array}{l}\left(\$700,000-\$290,000-\$110,000\right)\\ \times 70\%\end{array}\right]\\ =\$210,000\end{array}$

Working note (11):

Calculate loss on write-down of held-for-sale backscratcher:

$\begin{array}{c}\begin{array}{l}\text{Loss on write-down of held-for-sale }\\ \text{backscratcher for 2017 }\end{array}\}\text{=}\{\left[\begin{array}{l}\left(\begin{array}{l}\text{Fair value of assets}-\\ \text{Fair value of liabilities}\end{array}\right)-\\ \left(\begin{array}{l}\text{Book value of assets}-\\ \text{Book value of liabilities}\end{array}\right)\end{array}\right]\times 70\%\}\\ =\{\left[\begin{array}{l}\left(\$620,000-\$510,000\right)\\ -\left(\$720,000-\$450,000\right)\end{array}\right]\times 70\%\}\\ =\left[\begin{array}{l}\left(\$110,000-\$270,000\right)\\ \times 70\%\end{array}\right]\\ =\left(\$112,000\right)\end{array}$