Question

Jr

Company
Income Statement (in millions)
	Year 12	Year 11	Year 10
Sales	9,431	8,821	8,939
Gain on sale of branded product line			465
Cost of goods sold	(6,094)	(5,884)	(5,789)
Selling and admin expenses	(1,746)	(1,955)	(1,882)
Loss from expropriation of subsidiary		(27)
Interest income	27	23	25
Interest expense	(294)	(333)	(270)
Other income (expense)	(45)	1	(25)
Income before income taxes	1,279	646	1,463
Income tax expense	(445)	(168)	(573)
Net income	834	478	890
Jr Company is a marketer of branded foods to the retail and foodservice channels. After reading the notes to the financial statements you find the following exciting info:
1. Gain on sale of branded product line: In year 10, the sale of a portion of one of the branded product lines was completed for $735 million. The transaction resulted in a pretax gain of $464.5 million. The sale did not qualify as a discontinued operations. There was no information about the tax effect of the gain shown above.
2. Loss from expropriation of subsidiary: A loss occured in year 11 when a subsidiary was expropriated during a military coup in a previously stable country. The loss was $27 million.
3. Sale and promotion costs: In year 11, Jr changed the classification of certain sale and promotion incentives provided to customers and consumers. In the past Jr classified these incentives and selling and administrative expenses, with the gross amount of the revenue associated with the incentives reported in sales. Beginning in year 11, Jr changed to reporting the incentives as a reduction of revenues. As a result of this change, the company reduced reported revenues by $693 million in year 12, $610 million in year 11, and $469 million in year 10. The company stated that selling and administrative expenses were "correspondingly reduced such that net earnings were not affected." The income statement above already reflects the adjustments to sales revenues and selling and administrative expenses for years 10 through 12.
4. Tax rate: The U.S. federal statutory rate was 35% for each of the years presented.
REQUIRED:
a. Briefly discuss whether you would adjust the following items when using earnings to forecast future profitability of Jr.
i. Gain on sale of portion of branded product line.
ii. Loss from expropriation of subsidiary
b. Briefly discuss whether you believe the reclassification adjustments made for the sale and promotion incentive costs are appropriate.
c. Prepare an adjusted income statement after making the adjustment(s), if any from part b. Round all adjustments to the nearest million.
d. Prepare common size income statements using the information as provided above for year 10, 11, and 12. Set sales equal to 100%.
e. Prepare common size income statements after making the adjustments from part b. for year 10, 11, and 12. Set sales equal to 100%.
f. Assess the changes in the profitability of Jr during the 3 year period.

Answer 1

A) 1)money or profit received from sale of any product or services also known as the top line are transformed into the netincome.here profot on sale should be debited and assets should be credited.

2)amounts for the loss of assets can be accured and recorded,disclosed by amount and nature of the loss or ignored.

B)rrclasification adjustments can be used to describe moving an amount from one general ledger account to another.for example when companys long term note payable becomes due in less than one year the note will be reclassified to the current liabilities section of the balancesheet.in othet words amounts reclasified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.

C)adjusted income statement

Accounts. 12 11 . 10

sales. 9431. 8821 . 8989

expenses .   

Cost of goods sold. 6094. 5884. 5789

Selling and admin exp. 1746. 1955 . 1882

Loss from subsidy . - 27. -

Imterest exp . 294 333 270

Other exp. 45 . - 25  

Income tax exp. 445 . 168 . 573

1840. 787. 400

Add)

Gain on sale of branded product . - - 465

Intrrest income. 27 . 23 . 25

Other income . - 1. -

Income before incometax. 1279. 646. 890

Net income. 3146 . 1934. 3243

d)common size income statement

Accounts . 10. 11. 12

Sales. 100% 100% 100%

Cost of goods sold. 0.65. 0.67. 0.65

Gross profit . 0.35. 0.33. 0.35

Expenses

Selling. 0.18. 0.22. 0.60

Loss from subsidy. 0.003   

Interest exp. 0.031 0.037 0.030

Other exp. 0.004 0.002

Incometax exp . 0.047 . 0.019. 0.064

0.19. 0.089. 0.044

Add income

Gain on sale. 0.05

Int income. 0.002 . 0.002. 0.002

Other income. 0.001

Income before tax . 0.135 . 0.07. 0.099

Net income. 0.333. 0.22 . 0.36

F)assess the changes in the profitibility

11 year. New - old divided by old *100

12 year 28%

11 year 34%

10 year 26%