Question

Income Statement and Retained Earnings

The Huff Company presents the following partial list of account balances taken from its December 31, 2016 adjusted trial balance:

Sales (net)	$124,000			Operating expenses	$20,000
Interest expense	3,100			Common stock, $5 par	16,500
Cost of goods sold	56,000			Retained earnings, 1/1/2016	44,500

The following information is also available for 2016 and is not reflected in the preceding accounts:

The common stock has been outstanding all year. A cash dividend of $1.46 per share was declared and paid.

Land was sold at a pretax gain of $7,100.

Division X (a major component of the company) was sold at a pretax gain of $4,600. It had incurred a $9,430 pretax operating loss during 2016.

A tornado, which is an unusual event in the area, caused a $5,380 pretax loss.

The income tax rate on all items of income is 30%.

The average shareholders' equity is $90,000.

Required:

1. Prepare a 2016 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, 2016
		$
		$
		$
Other items
	$
		$
		$
Results from discontinued operations
	$
		$
Components of Income		EPS
		$
		$

2. Prepare a 2016 retained earnings statement.

HUFF COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2016
	$
	$
	$

3. Compute the 2016 return on common equity. Round to one decimal place.

%

Answer 1

Hey there !!
In this question we have been provided with various adjustments and we need to prepare Statement of Profit and loss incorporating these adjustments.

Let us prepare SPL first.

HUFF COMPANY
Income Statement (Multi-Step)
For Year Ended December 31, 2016
Sales		$124,000
Cost of goods sold		-$56,000
Operating expenses		-$20,000
Interest expense		-$3,100
Net Operating profit		$44,900
Other items
Profit from Sale of Land	$7,100
Extraordinary Loss from Tornado	-$5,380
Profit on sale of Division X	$4,600
Net profit from Extrarodinary items		$6,320
Total Profit		$51,220
Results from discontinued operations		-$9,430
Profit during the Year		$41,790
Less : Taxes		$12,537
Net profit		$29,253
Less : Dividend
Components of Income
No of Share	16500
EPS	= 29253/16500	$1.77
DPS		$1.46

Now let us calculate Dividend payable :

Common Stock (Assumed to be No.)	16500
Fair Value per share	$5
Dividend per share	1.46
Total Dividend Payable	$                24,090

Now we can prepare statement of retained earnings:

HUFF COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2016
Opening Balance	$44,500
Add : Profits	$29,253
Less : Dividends paid	-$24,090
Retained Earnings at Year end	$49,663

We also have to calculate return on equity.

Return on Equity = Net Profits/ Average Equity employed
Net profits	29253
Equity	90000
=29253/ 90000	33%

I hope the above solution and working is clear to you now. Do let me know in case of any concerns.

All the best!! Happy studying !!!