Chapter 4, Problem 4.1P

Comparative income statements; multiple-step format

• LO4–1, LO4–3, LO4–4, LO4–5

Selected information about income statement accounts for the Reed Company is presented below (the company’s fiscal year ends on December 31).

	2018	2017
Sales	$4,400,000	$3,500,000
Cost of goods sold	2,860,000	2,000,000
Administrative expenses	800,000	675,000
Selling expenses	360,000	12,000
Interest revenue	150,000	140,000
Interest expense	200,000	200,000
Loss on sale of assets of discontinued component	50,000	—

On July 1, 2018, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2018, for $50,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:

	1/1/2018–9/30/2018	2017
Sales	$400,000	$500,000
Cost of goods sold	(290,000)	(320,000)
Administrative expenses	(50,000)	(40,000)
Selling expenses	(20,000)	(30,000)
Operating income before taxes	$ 40,000	$110,000

In addition to the account balances above, several events occurred during 2018 that have not yet been reflected in the above accounts:

a. A fire caused $50,000 in uninsured damages to the main office building. The fire was considered to be an infrequent but not unusual event.

b. Inventory that had cost $40,000 had become obsolete because a competitor introduced a better product. The inventory was sold as scrap for $5,000.

c. Income taxes have not yet been recorded.

Required:

Prepare a multiple-step income statement for the Reed Company for 2018, showing 2017 information in comparative format, including income taxes computed at 40 percent and EPS disclosures assuming 300,000 shares of common stock.