Question

Question: Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the company’s financial statements at year-end. Currently, he is focusing on the income statement and determining the format for reporting comprehensive income. During the year, the company earned net income of \(400,000 and had unrealized gains on available-for-sale securities of \)15,000. In the previous year, net income was $410,000, and the company had no unrealized gains or losses.

Instructions

(a) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the two statement format.

(b) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the one statement format.

(c) Which format should Nelson recommend?

Short answer

The two statement format of reporting comprehensive income is recommended by Nelson.

Step-by-step solution

Meaning of Income Statement

An income statement is a report that contains the revenues and expenses of a business entity for a particular accounting period. Such a report ascertains the profits earned or losses incurred from operating and non-operating activities.

Preparation of two statement format

Jenkins Corporation
Comparative Income Statement
For the year ended…………
Particulars	Current Year	Previous Year
Sales revenue
Less: Cost of goods sold
Gross profit
Less: Operating expense
Net income	$400,000	$410,000

Jenkins Corporation
Comparative Income Statement
For the year ended…………
Particulars	Current Year	Previous Year
Net income	$400,000	$410,000
Other comprehensive income
Unrealized holding gain	$15,000	$0
Comprehensive income	$415,000	$410,000

Preparation of one statement format

Recommended format

The two-statement format of reporting comprehensive income is recommended because it involves the preparation of two different statements and helps in understanding the identification of gains or losses associated with the comprehensive income.