Maher Inc Reported Income From Continuing Operations Before Taxes
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Question 3P
Expert-verified
Found in: Page 187
Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201
Short Answer
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.
- The corporation experienced an uninsured flood loss in the amount of $90,000 during the year.
- 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.
- Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax).
- 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).
- 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.
- 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.)
The net income of the company is $474,650.
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Step by Step Solution
Meaning of Income Statement
An income statement contains the expenses and revenues associated with an accounting period. It facilitates the business entities to determine their profits earned or losses incurred by various business operations.
Preparation of income statement
| In the books of Maher Inc. Income Statement For the year ended 2017 | ||
| Particulars | Details | Amounts ($) |
| 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 |
Most popular questions for Business-studies Textbooks
Question: Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017.
(000 omitted)
Net sales revenue $640,000
Costs and expenses
Cost of goods sold $500,000
Selling, general, and administrative expenses 66,000
Other, net 17,000
583,000
Income before income tax 57,000
Income tax 19,400
Net income 37,600
Retained earnings at beginning of period, as previously reported 141,000
Adjustment required for correction of error (7,000)
Retained earnings at beginning of period, as restated 134,000
Dividends on common stock (12,200)
Retained earnings at end of period $159,400
Additional facts are as follows.
1. "Selling, general, and administrative expenses" for 2017 included a charge of $8,500,000 that was usual but infrequently occurring.
2. "Other, net" for 2017 included a loss on sale of equipment of $6,000,000.
3. "Adjustment required for correction of an error" was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).
4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
The following financial statement was prepared by employees of Walters Corporation.
WALTERS CORPORATION
INCOME STATEMENT
THE YEAR ENDED DECEMBER 31, 2017
Revenues
Gross sales, including sales taxes $1,044,300
Less: Returns, allowances, and cash discounts 56,200
Net sales 988,100
Dividends, interest, and purchase discounts 30,250
Recoveries of accounts written off in prior years 13,850
Total revenues 1,032,200
Costs and expenses
Cost of goods sold, including sales taxes 465,900
Salaries and related payroll expenses 60,500
Rent 19,100
Delivery expense and freight in 3,400
Bad debt expense 27,800
Total costs and expenses 576,700
Income before other items 455,500
Other items
Loss on discontinued styles (Note 1) 71,500
Loss on sale of marketable securities (Note 2) 39,050
Loss on sale of warehouse (Note 3) 86,350
Total other items 196,900
Net income $258,600
Net income per share of common stock $2.30
Note 1: New styles and rapidly changing consumer preferences resulted in a $71,500 loss on the disposal of discontinued styles and related accessories.
Note 2: The Corporation sold an investment in marketable securities at a loss of $39,050. The corporation normally sells securities of this nature.
Note 3: The Corporation sold one of its warehouses at an $86,350 loss.
Instructions
Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You should explain why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.
Recommended explanations on Business-studies Textbooks
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