Chapter 4, Problem 4.7P

Income statement presentation; statement of comprehensive income; unusual items

• LO4–1, LO4–3 through LO4–6

The following income statement items appeared on the adjusted trial balance of Schembri Manufacturing Corporation for the year ended December 31, 2018 ($ in thousands): sales revenue, $15,300; cost of goods sold, $6,200; selling expenses, $1,300; general and administrative expenses, $800; interest revenue, $85; interest expense, $180. Income taxes have not yet been recorded. The company’s income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company’s income statement every year. The company’s controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2018 ($ in thousands). All transactions are material in amount.

1. Investments were sold during the year at a loss of $220. Schembri also had unrealized gains of $320 for the year on investments.

2. One of the company’s factories was closed during the year. Restructuring costs incurred were $1,200.

3. During the year, Schembri completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP. The division had incurred a loss from operations of $560 in 2018 prior to the sale, and its assets were sold at a gain of $1,400.

4. In 2018, the company’s accountant discovered that depreciation expense in 2017 for the office building was understated by $200.

5. Negative foreign currency translation adjustment for the year totaled $240.

Required:

1. Prepare Schembri’s single, continuous multiple-step statement of comprehensive income for 2018, including earnings per share disclosures. One million shares of common stock were outstanding at the beginning of the year and an additional 400,000 shares were issued on July 1, 2018.

2. Prepare a separate statement of comprehensive income for 2018.

To determine

Income statement:

Income statement is one form of financial statement which reports revenues and expenses from business operations and the result of those operations are reported as net income or net loss for a particular time period.

To prepare: The single, continuous multi-step statement of comprehensive income including EPS disclosure of Corporation SM for the year ended December 31, 2018.

Explanation of Solution

Corporation SM
Statement of Comprehensive Income
For the year ended December 31, 2018
Particulars	Amount (in '000s)	Amount (in '000s)
Sales revenue		$15,300
Cost of goods sold		-$6,200
Gross profit		$9,100
Operating expenses:
Selling	$1,300
General and administrative	$800
Restructuring costs	$1,200
Total operating expenses		-$3,300
Operating income		$5,800
Other income (expense):
Loss on sales of investments	-$220
Interest expense	-$180
Interest revenue	$85
Other income (expense)		-$315
Income from continuing operations before income tax		$5,485
Income tax expense (1)		-$2,194
Income from continuing operations		$3,291
Discontinued operations:
Income from operationsof discontinued component    (including gain on disposal of $1,400) (2)	$840
Income tax expense (3)	-$336
Income on discontinued operations		$504
Net income		$3,795
Other comprehensive income (loss):
Unrealized gains from investments, net of tax (4)	$192
Loss from foreign currency translation, net of tax (5)	-$144
Total other comprehensive income		$48
Comprehensive income		$3,843
Earnings per share:
Income from continuing operations (6)	$2.74
Discontinued operations  (8)	-$0.42
Net income	$3.16

Table (1)

Working Notes:

Determine the amount of income tax expense.

$\begin{array}{c}\text{Amount of income tax expense}\}=\left(\begin{array}{l}\text{Income from continuing }\\ \text{operations before income tax}\end{array}\right)\times \frac{\text{Rate of tax}}{100}\\ \text{=\$5,485}\times \frac{40}{100}\\ \text{=\$2,194}\end{array}$ (1)

Determine the amount of income from operations of discontinued component.

$\begin{array}{c}\begin{array}{l}\text{Amount of income from operations}\\ \text{ of discontinued component}\end{array}\}=\left(\begin{array}{l}\text{Amount of gain from}\\ \text{ sale of asset}\end{array}\right)-\left(\begin{array}{l}\text{Amount of loss }\\ \text{from operations}\end{array}\right)\\ \text{=\$1,400}-\$560\\ \text{=\$840}\end{array}$ (2)

Determine the amount of income tax expense of income from operations of discontinued component.

$\begin{array}{c}\begin{array}{l}\text{Amount of income tax expense}\\ \text{of income from operations of}\\ \text{discontinued component}\end{array}\}=\left(\begin{array}{l}\text{Income from operations of }\\ \text{discontinued component }\end{array}\right)\times \frac{\text{Rate of tax}}{100}\\ \text{=\$840}\times \frac{40}{100}\\ \text{=\$336}\end{array}$ (3)

Determine the amount of net of tax on unrealized gains from investments.

$\begin{array}{c}\begin{array}{l}\text{Net of tax amount on unrealized }\\ \text{gains on investment securities}\end{array}\}=\left\{\begin{array}{l}\text{Unrealized gains on }\\ \text{investment securities}\times \left(1-\text{Tax rate}\right)\end{array}\right\}\\ \text{=\$320}\times \left(1-40\%\right)\\ \text{=\$192 }\end{array}$ (4)

Determine the amount of net of tax on loss from foreign currency translation.

$\begin{array}{c}\begin{array}{l}\text{Net of tax amount on loss }\\ \text{from foreign currency translation}\end{array}\}=\left\{\begin{array}{l}\text{Loss from foreign }\\ \text{currency translation}\times \left(1-\text{Tax rate}\right)\end{array}\right\}\\ \text{=\$240}\times \left(1-40\%\right)\\ \text{=\$144}\end{array}$ (5)

Determine the amount of earning per share of income from continued operations.

$\begin{array}{c}\text{Earning per share}=\frac{\text{Income from continued operations}}{\text{Number of common stock outstanding }\left(7\right)}\\ \text{=}\frac{\$3,291}{1.2}\\ \text{= \$2}\text{.74}\end{array}$ (6)

Determine the number of common stock outstanding.

$\begin{array}{c}\begin{array}{c}\text{Number of common}\\ \text{ stock outstanding}\end{array}\}=\left(\begin{array}{l}\text{Common stock at the }\\ \text{beginning of the year}\end{array}\right)+\left\{\left(\begin{array}{l}\text{Common stock issued at }\\ \text{the middle of the year}\end{array}\right)\times \frac{6}{12}\right\}\\ \text{=}\left(1\text{ million}\right)+\left\{\left(0.4\text{ million}\right)\times \frac{6}{12}\right\}\\ \text{= }\left(1\text{ million}\right)+\left\{0.2\text{ million}\right\}\\ =1.2\text{ millions}\end{array}$ (7)

Determine the amount of earning per share of income from discontinued operations.

$\begin{array}{c}\text{Earning per share}=\frac{\text{Income from discontinued operations}}{\text{Number of common stock outstanding }\left(7\right)}\\ \text{=}\frac{\$504}{1.2}\\ \text{= \$2}\text{.74}\end{array}$ (8)

Conclusion

The net income of Corporation SM for the year ended December 31, 2018 is $3,795.

To determine

Statement of comprehensive income:

It is a statement prepared to determine the total revenue, expenses, gains and losses in the reported year that includes some unusual and extraordinary transactions that may not always affect the changes in owner’s equity.

To prepare: The statement of comprehensive income of Corporation SM for the year ended December 31, 2018.

Explanation of Solution

Corporation SM
Statement of Comprehensive Income
For the year ended December 31, 2018
Particulars	Amount (in '000s)	Amount (in '000s)
Net income		$3,795
Other comprehensive income (loss):
Unrealized gains from investments, net of tax (1)	$192
Loss from foreign currency translation, net of tax  (2)	-$144
Total other comprehensive income		$48
Comprehensive income		$3,843

Table (2)

Working Notes:

Determine the amount of net of tax on unrealized gains from investments.

$\begin{array}{c}\begin{array}{l}\text{Net of tax amount on unrealized }\\ \text{gains on investment securities}\end{array}\}=\left\{\begin{array}{l}\text{Unrealized gains on }\\ \text{investment securities}\times \left(1-\text{Tax rate}\right)\end{array}\right\}\\ \text{=\$320}\times \left(1-40\%\right)\\ \text{=\$192 }\end{array}$ (1)

Determine the amount of net of tax on loss from foreign currency translation.

$\begin{array}{c}\begin{array}{l}\text{Net of tax amount on loss }\\ \text{from foreign currency translation}\end{array}\}=\left\{\begin{array}{l}\text{Loss from foreign }\\ \text{currency translation}\times \left(1-\text{Tax rate}\right)\end{array}\right\}\\ \text{=\$240}\times \left(1-40\%\right)\\ \text{=\$144}\end{array}$ (2)

Conclusion

Thus, comprehensive income for the year ended December 31, 2018 is $3,843.