HW-2 Income Statement

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University of Richmond *

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463

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Accounting

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Apr 3, 2024

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HW-2 Income Statement Issues A B C D E F Instructions: Step 1. Compute income from continuing operations (ICO) before taxes: (Note: Expenses must be listed as negative amounts) $ 790,000 Item A Flood loss (90,000) B Correction of depreciation 1,500 C Loss on sale of security (57,000) D Gain on life insurance 104,000 E Item not included in determining ICO F Change in inventory method 0 748,500 SMC Inc. reported income from continuing operations before taxes during 2019 of $790,000. Additional transactions occurring in 2019 but not considered in the $790,000 are as follows. The corporation experienced an uninsured flood loss in the amount of $90,000 during the year. At the beginning of 2017, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2017, 2018, and 2019, but failed to deduct the salvage value in computing the depreciation base. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax). When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable). The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this transaction was a significant strategic shift for the company. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2017 income by $60,000 and decrease 2018 income by $20,000 before taxes. The FIFO method has been used for 2019. The tax rate on these items is 40%. Prepare an income statement for the year 2019 starting with income from continuing operations (ICO) before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.) You may NOT need all boxes provided. Income from continuing operations (before items) Income from continuing operations (adjusted)

Income from continuing operations (from above) 748,500 Adjustment for non-taxable items Gain on life insurance 104,000 Pretax accounting income 644,500 × Tax rate 30% Tax expense 193,350 Income from continuing operations before taxes 748,500 Less: Tax Expense 193,350 Income from continuing operations 555,150 Discontinued operations Loss on disposal of division 115,000 Less: tax effect (34,500) Net discontinued operations 80,500 Net Income 474,650 Step 4. Earnings Per share of common stock: Per share Income from continuing operations $ 4.63 Discontinued operations (0.67) Net income $ 3.96 Step 2. Computation of income tax expense: SMC INC. Income Statement (Partial) For the Year Ended December 31, 2019 Step 3. Prepare the Income statement

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