Ch. 4.2 Handout SLN

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Apr 3, 2024

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ACC 401 – Financial Reporting I Dr. Scott C. Jackson, PhD Ch. 4 – The Income Statement and Comprehensive Income (Part II) 1. Using the “Investor Relation” link of a company’s website, compare the activity and profitability for two peer/competitor companies operating in the same industry. Using this information, make an investment recommendation. a. Activity Answers will vary. Students could examine asset/receivable/inventory turnover ratios to measure activity. b. Profitability Answers will vary. Students could examine profit margin on sales, return on assets, and/or return on equity ratios to measure profitability. 2. Finley Corporation had income from continuing operations of $10,600,000 in 2020. During 2020, it disposed of its restaurant division at an after-tax loss of $189,000. Prior to disposal, the division operated at a loss of $315,000 (net of tax) in 2020 (assume that the disposal of the restaurant division meets the criteria for recognition as a discontinued operation and that the income tax rate is 30%.) Finley had 10,000,000 shares of common stock outstanding during 2020. Prepare a partial income statement for Finley beginning with income from continuing operations. Income from Continuing Operations $10,600,000 Discontinued Operations Loss from operation of discontinued operation ($450,000) Less: Applicable income tax 135,000 ($315,000) Loss from disposal of discontinued operation ($270,000) Less: Applicable income tax 81,000 (189,000) Net Income 10,096,000 Earnings per Share $ / share Income from Continuing Operations (10,600,000/10,000,000) 1.06 Discontinued Operations (-504,000/10,000,000) (0.05) Net income (10,096,000/10,000,000) 1.0096

3. Rafter Corp. has 400,000 shares of common stock outstanding. In 2020, the company reports income from continuing operations before income tax of $2,680,000. Additional transactions not considered in the $2,680,000 are as follows: 1. In 2020, Rafter Corp. sold available-for-sale investments for $86,000. The investments had originally cost $80,000. The gain or loss is considered ordinary. 2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $450,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was $390,000 before taxes; the loss from disposal of the subsidiary was $60,000 before taxes. 3. An internal audit discovered that depreciation of equipment was overstated by $40,000 (net of tax) in a prior period. The amount was charged against retained earnings. 4. The company had a loss of $60,000 on the condemnation of much of its property. Instructions: Analyze the above information and prepare an income statement for the year 2020, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 19% on all items, unless otherwise indicated.)

RAFTER CORP. Income Statement (Partial) For the Year Ended December 31, 2020 Income from continuing operations before income tax $2,626,000* Income tax 498,940** Income from continuing operations 2,127,060 a Discontinued operations Loss from operations of discontinued subsidiary $(390,000) Less: Applicable income tax reduction at 19% 74,100 $(315,900) Loss from disposal of subsidiary (60,000) Less: Applicable income tax reduction at 19% 11,400 (48,600) (364,500) c Net income $1,762,560 b Per share of common stock: Income from continuing operations ($2,127,060 a ÷ 400,000) $5.32 Discontinued operations, net of tax [$(364,500 c ) ÷ 400,000] (0.91) Net income ($1,762,560 b ÷ 400,000) $4.41 * Computation of income from continuing operations before income tax: As previously stated $2,680,000 Gain on sale of investments ($86,000 – $80,000) 6,000 Loss on condemnation (60,000) Restated $2,626,000 **Computation of income tax expense: $2,626,000* X 19% = $498,940 Note: The error related to depreciation was correctly charged to retained earnings.

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5. The following information is related to Diego Company for the year 2025. Cost of goods sold $260,000 Loss on plastics division operations related to discontinued operations $ 60,000 Other revenues and gains 5,600 Net sales 440,000 Unrealized gain on available-for-sale securities 15,000 Other expenses and losses 9,600 Gain on disposal of plastics division related to discontinued operations 50,000 Operating expenses 130,000 a. Prepare a multiple-step income statement and a comprehensive income statement for Diego Company (the two statement approach). The income tax rate is 30%, and the weighted-average number of common shares outstanding is 10,000.