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) $122,000 Operating expenses $27,300 Interest expense 3,100 Common stock, $5 par 22,000 Cost of goods sold 58,000 Retained earnings, 1/1/2019 42,700 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 $1.02 per share was declared and paid. 2. Land was sold at a pretaz gain of $5,100. 3. Division X (a major component of the company) was sold at a pretax gain of $4,660. It had incurred a $9,410 pretax operating loss during 2019. 4. A tornado, which is an unusual event in the area, caused a $5,360 pretax loss. 5. The income tax rate on all items of income is 30%. 6. The average shareholders' equity is $90,000. Required:

Answer 1

Solution: 1

Below is the Income statement for Huff company

Working $122,000 $58,000 $ 64,000 $122,000 - $58,000 $27.300 $36,700 $64,000 - $27,300 Huff Company Income Sttaement For the year ended 31 December Sales (net) Cost of Good sold Gross profit Less: Operating Expenses Operating Income Other Items Gain on sale of Land Loss caused from tornado Interest expense Pretax income from continuing operations Income tax expense Income from Continuing operations Results from discontinuing operations Loss from operations of discontinued division X (net of Income tax Gain on disposal of Division X (net of income tax) Net Income $5,100 ($5,360) ($3,100) ($3,360) ($5,100-$ 5,360 - $3,100) $33,340 ($36,700 - $3,360) $10,002 ($33,340 * 30%) $23,338 ($33,340 - 10,002) ($6,587) $3,262 $9,410 * (100-30)% ($3,325) $4,660 * (100-30)% $20,013 $23,338 - $3,325) Component of Net Income Income from Continuing operations Income/(loss) from discontinuing operations Net Income Earning per Cor Working $5.30 $23,338 / 4,400 shares ($0.76) $3,325 / 4,400 shares $4.55 $20,013 / 4,400 shares No. of Shares = Total common shares value / par value per share = $22,000 / $5 = 4,400 shares

Solution: 2

Below is the reatined earning statement

HUFF COMPANY Statement of Retained Earnings For year Ended December 31, 2019 Particulars Amount $ Working Retained Earning as on 01/01/2019 $42,700 Add: Net Income for 2019 $20,013 $62,713 $42,700 + $ 20,013 Less: Cash dividend $4,488 4,400 shares * $1.02 Retained Earning as on 12/31/2019 $58,225 $62,713 - $4,488

Solution: 3

Below is the calculation of Return on Equity

Return on Common Equity Retun on Common Equity = net income / average shareholders' equity Net Income Average shareholders equity Return on common equity $20,013 $90,000 22.24%