Chapter 5, Problem 5.14P

Income statement presentation; installment sales method (Chapters 4 and 5)

Reagan Corporation computed income from continuing operations before income taxes of $4,200,000 for 2018. The following material items have not yet been considered in the computation of income:

1. The company sold equipment and recognized a gain of $50,000. The equipment had been used in the manufacturing process and was replaced by new equipment.

2. In December, the company received a settlement of $1,000,000 for a lawsuit it had filed based on antitrust violations of a competitor. The settlement was considered to be an unusual and infrequent event.

3. Inventory costing $400,000 was written off as obsolete. Material losses of this type were incurred twice in the last eight years.

4. It was discovered that depreciation expense on the office building of $50,000 per year was not recorded in either 2017 or 2018.

In addition, you learn that included in revenues is $400,000 from installment sales made during the year. The cost of these sales is $240,000. At year-end, $100,000 in cash had been collected on the related installment receivables. Because of considerable uncertainty regarding the collectibility of receivables from these sales, the company’s accountant should have used the installment sales method to recognize revenue and gross profit on these sales.

Also, the company’s income tax rate is 40% and there were 1 million shares of common stock outstanding throughout the year.

Required:

Prepare an income statement for 2018 beginning with income from continuing operations before income taxes. Include appropriate EPS disclosures.