Question

Income Statement and Retained Earnings

The Huff Company presents the following partial list of account balances taken from its December 31, 2019 adjusted trial balance:

Sales (net)	$123,000			Operating expenses	$20,600
Interest expense	4,300			Common stock, $5 par	5,500
Cost of goods sold	51,000			Retained earnings, 1/1/2019	41,700

The following information is also available for 2019 and is not reflected in the preceding accounts:

1. The common stock has been outstanding all year. A cash dividend of $1.3 per share was declared and paid.
2. Land was sold at a pretax gain of $5,500.
3. Division X (a major component of the company) was sold at a pretax gain of $4,620. It had incurred a $9,440 pretax operating loss during 2019.
4. A tornado, which is an unusual event in the area, caused a $5,320 pretax loss.
5. The income tax rate on all items of income is 30%.
6. The average shareholders' equity is $89,000.

Required:

1. Prepare a 2019 multiple-step income statement for Huff. Round earnings per share computations to two decimal places.

HUFF COMPANY
Income Statement (Multi-Step)
For Year Ended December 31, 2019
		$
		$
		$
Other items
	$
		$
		$
Results from discontinued operations
	$
		$
Components of Income		Earnings per Common Share
		$
		$

2. Prepare a 2019 retained earnings statement.

HUFF COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2019
	$
	$
	$

3. Compute the 2019 return on common equity. Round to one decimal place.

%

Answer 1

Answer:

1.)

Sales Revenue		$123,000
Cost of goods sold		51,000
Gross profit		72,000
Operating expenses		20,600
Operating income		51,400
Other items:
Interest Expense	($4,300)
Gain on sale of land	$5,500
Loss on unusual event	($5,320)	($4,120)
Pretax income from continuing operations		47,280
Income tax expense (30%)		($14,184)
Income from continuing operations		33,096
Results from discounted operations:
loss from operations of discounted division X	($9440)
Gain on disposal of division X	4620	($4820)
Net Income		28,276
		Earning per share
		(1,100 shares)
Component of income
Income from continuing operation (33,096 ÷ 1,100)		$30.09
Results from discontinued operations (4,820 ÷ 1,100)		(4.38)
Net income		25.71

Working notes:

Number of common stock = total common stock ÷ Face value per share

= $5,500 ÷ 5

= 1,100 shares

.

2.) Retained earnings statement

Beginning retained earnings	$41,700
Add: Net income	28,276
Less: Cash payment of dividend	($1,430)
Ending retained earnings	$68,546

Workings:

Dividend payment:

= Number of shares × Dividend per share

= 1,100 × $1.30

= $1,430

.

3.)

Return on common equity = Net income ÷ Average common equity

= $28,276 × 89,000

= .318