P5-5        Comprehensive: Income Statement and Retained Earnings The Houston Manufacturing Company presents the fol- lowing partial list of account balances, after adjustments, as of December 31, 2007:

 

Sales salaries expense	$ 27,400	Sales personnel travel expenses	$    8,300
Miscellaneous  administrative expenses	3,000	Property taxes and insurance expense	9,000
Sales returns	5,000	Retained earnings, January 1, 2007	200,800
Sales	468,200	Depreciation expense: sales equipment	9,000
Interest revenue	3,200	Advertising expense	15,700
Office and administrative salaries	30,000	Miscellaneous rent revenue	5,900
Delivery expenses	11,700	Common stock, $10 par	200,000
Loss on sale of factory equipment (pretax)	4,100	Depreciation expense: buildings and
Cost of goods sold	232,200	office equipment	14,400

The following information is also available but is not reflected in the preceding accounts:

1.      The company sold Division E (a component of the company) on August 1, 2007. During 2007, Division E had  incurred a pretax loss from operations of $16,000. However, because the acquiring company could vertically integrate Division E into its facilities, the Houston Manufacturing Company was able to recognize a $42,000 pretax gain on the sale.

2.      On January 2, 2007, without warning, a foreign country expropriated a factory of Houston Manufacturing Company, which had been operating in that country. As a result of that expropriation, the company has incurred a pretax loss of $30,000.

3.      In preparing its 2007 adjusting entries at year-end, the company discovered that it had not recorded $10,100 of depreciation on its office building during 2006. This error did not affect the 2007 depreciation expense.

4.      The common stock was outstanding for the entire year. A cash dividend of $1.20 per share was declared and paid in 2007.

5.      The 2007 income tax expense totals $28,020 and consists of the following:

 

Tax expense on income from continuing operations	$32,250
Tax  credit on Division E operating  loss	(4,800)
Tax expense on gain from sale of Division E	12,600
Tax credit on loss from expropriation	(9,000)
Tax credit on 2006 depreciation error	(3,030)
	$28,020

Required

1.      As supporting documents for Requirement 2, prepare separate supporting schedules for selling expenses and for general and administrative expenses (include depreciation expense where applicable in these schedules).

2.      Prepare a 2007 multiple-step income statement for the Houston Manufacturing Company.

3.      Prepare a 2007 retained earnings statement.

4.      What was Houston Manufacturing Company’s return on stockholders’ equity for 2007 if its average stockholders’ equity during 2007 was $500,000? What is your evaluation of this return on stockholders’ equity if its “target” for 2007 was 15%?