Question 3P - Intermediate Accounting (Kieso)

Question

Maher Inc. reported income from continuing operations before taxes during 2017 of \(790,000. Additional transactions occurring in 2017 but not considered in the \)790,000 are as follows.

1. The corporation experienced an uninsured flood loss in the amount of \(90,000 during the year. 
2. 2. At the beginning of 2015, the corporation purchased a machine for \)54,000 (salvage value of \(9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, but failed to deduct the salvage value in computing the depreciation base. 
3. Sale of securities held as a part of its portfolio resulted in a loss of \)57,000 (pretax). 
4. 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). 
5. The corporation disposed of its recreational division at a loss of \(115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. 
6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2015 income by \)60,000 and decrease 2016 income by $20,000 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40%.

Instructions 

Prepare an income statement for the year 2017 starting with income from continuing operations 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.)

Step-by-Step Solution

Answer

The net income of the company is $474,650. 

Meaning of Income Statement

An income statement contains the expenses and revenues associated with an accounting period. It facilitates the business entities to determine their profits earned or losses incurred by various business operations.

Preparation of income statement

In the books of Maher Inc. Income Statement For the year ended 2017
Particulars	Details	Amounts ($)
Income from continuing operations before tax (Note No.1)		838,500
Less: Income tax (Note No. 2)		(220,350)
Income from continuing operations		618,150
Discontinued operations
Loss on disposal of recreational division	115,000
Less: Income tax @ 30%	(34,500)	(80,500)
Income before extraordinary items		537,650
Extraordinary items
Loss from flood	90,000
Less: Income tax @ 30%	(27,000)	(63,000)
Net income		474,650
Per share income
Income from continuing operations (618,150/120,000)		5.15
Discontinued operations (80,500/120,000)		(0.67)
Income before extraordinary items (537,650/120,000)		4.48
Extraordinary item, net of tax (63,000/120,000)		(0.53)
Net income (474,650/120,000)		3.95

 

Note No.1: Computation of restated income from continuing operations 

Particulars	Amounts ($)
Income from continuing operations (given)	790,000
Less: Loss on sale of securities	(57,000)
Add: Gain on proceeds from an insurance policy ($150,000-$46,000)	104,000
Adjustments of error in depreciation computation
Incorrect depreciation ($54,000/6)                                                          9,000
Correct depreciation ($54,000-$9,000)/6                                                7,500	1,500
Restated income from continuing operations	$838,500

 

Note No.2: Computation of income tax

Particulars	Amounts ($)
Income from continuing operations before tax	838,500
Less: Nontaxable income (Gain on an insurance claim)	(104,000)
Taxable income	734,500
Tax rate	@ 30%
Income tax expense	$220,350