Week 2
Homework Solutions

EXERCISE 4-4 (20–25 minutes) LEROI JONES INC. | Income Statement | For Year Ended December 31, 2014 | Revenues | | | Net sales ($1,250,000(b) – $17,000) | | $1,233,000 | Expenses | | | Cost of goods sold | 500,000 | | Selling expenses | 400,000(c) | | Administrative expenses | 100,000(a) | | Interest expense | 20,000 | | Total expenses | | 1,020,000 | Income before income tax | | 213,000 | Income tax | | 63,900 | Net income | | $ 149,100 | Earnings per share | | $ 7.46* |
*Rounded

EXERCISE 4-4 (Continued) Determination of amounts (a) Administrative expenses | = | 20% of cost of good sold | | = | 20% of $500,000 | | = | $100,000 | | | | (b) Gross sales X 8% | = | administrative expenses | | = | $100,000 ÷ 8% | | = | $1,250,000 | | | | (c) Selling expenses | = | four times administrative expenses. | | | (operating expenses consist of selling | | | and administrative expenses; since | | | selling expenses are 4/5 of operating | | | expenses, selling expenses are 4 | | | times administrative expenses.) | | = | 4 X $100,000 | | = | $400,000 | | | | Earnings per share $7.46 ($149,100 ÷ 20,000) | Note: An alternative income statement format is to show income tax part of expenses, and not as a separate item. In this case, total expenses are $1,083,900.

EXERCISE 4-12 (20–25 minutes) (a) EDDIE ZAMBRANO CORPORATION | Retained Earnings Statement | For the Year Ended December 31, 2014 | Balance, January 1, as reported | | $225,000* | Correction for depreciation error (net of $10,000 tax) | | (15,000) | Cumulative decrease in