Question

Selected information for Muffin’s Muffins Inc. for 2018 is presented below. All amounts are pretax. The effective tax rate is 30%.

Loss from operations of discontinued line of business                                   $   420,000

Inventory                                                                                                         3,185,000

Administrative expenses                                                                                      479,000

Retained earnings, beg balance                                                                     2,749,600

Interest expense                                                                                                  101,600     

Accounts receivable, net                                                                                     573,200

Unrealized holding loss on available-for-sales securities                                  118,800     

Dividends declared and paid                                                                                241,750

Cumulative decrease in income for change in depreciation method                  197,000

Bonds Payable                                                                                               1,380,000

Gain on disposal of discontinued line of business                                             174,000

Sales                                                                                                                4,700,000

Loss due to flooding                                                                                           319,200

Accumulated depreciation                                                                              2,943,700

Cumulative decrease in income of change from FIFO to weighted average       87,900

Gain on sale of land                                                                                             267,000

Cumulative increase in income for reduced estimate for bad debts

     from 4% to 2.5%                                                                                               81,000

Selling expenses                                                                                                  326,700

Foreign currency translation gain                                                                        103,900

Common stock, 240,000 shares                                                                     8,641,000     

Accumulated other comprehensive income, beg balance (CR)                       693,470

Failed to recognize interest on investment in 2017                                             136,000

Dividend Income                                                                                                    91,000

Cost of goods sold                                                                                          2,745,000

Based on the above information, answer the following questions.

(HINT: Prepare a multi-step income statement and retained earnings statement

1. What amount would be reported for operating income?
2. What amount would be reported in a 2018 income statement for income tax?

Answer 1

	Income Statement of Muffin's Muffins Inc. for 2018
			amounts in US $
	Revenues		4,700,000
	COGS		2,745,000
	Gross Profit		1,955,000
	Operating Expenses:
	Administrative expenses		479,000
	Selling expenses		326,700
	Other operating Expenses
	Total Op Expenses		805,700
	Operating Income /(Loss)		1,149,300
	Total Other Income/Expenses
	EBDIT		1,149,300
	Depreciation and amortization		197,000
	EBIT		952,300
	Interest Expense		101,600
	EBT		850,700
	Income Tax Expense (30%)	Note 6	(262,950)
	Net Income Continuing ops		587,750
	Non-recurring Events:
	Gain/Loss from Discontinued Operations	Note 1	(246,000)
	Extraordinary Items	Note 2	(52,200)
	Effect of Change In Accounting Estimate	Note 3	81,000
	Effect of Accounting Change	Note 4	(87,900)
	Other Items	Note 5	194,900
	Net Income		477,550
Working Notes:-
Note 1	Gain/Loss from Discontinued Operations
	Gain on disposal of discontinued line of business	174000
	Loss from operations of discontinued line of business	-420000	(246,000)
Note 2	Extraordinary Items
	Loss due to flooding	-319200
	Gain on sale of land	267000	(52,200)
Note 3	Effect of Change In Accounting Estimate
	Cumulative increase in income for reduced estimate for bad debts from 4% to 2.5%		81000
Note 4	Effect of Accounting Change
	Cumulative decrease in income of change from FIFO to weighted average		(87,900)
Note 5	Other Items
	Foreign currency translation gain	103900
	Dividend Income	91000	194,900
Note 6	Calculating Income tax
	Sales	4700000
	Gain on sale of land	267000
	Foreign currency translation gain	103900
	Dividend Income	91000
	Failed to recognize interest on investment in 2017	136000
	Cumulative increase in income for reduced estimate for bad debts from 4% to 2.5%	81000
	Gain on disposal of discontinued line of business	174000	5,552,900
	Cost of goods sold	-2745000
	Administrative expenses	-479000
	Interest expense	-101600
	Cumulative decrease in income for change in depreciation method	-197000
	Selling expenses	-326700
	Cumulative decrease in income of change from FIFO to weighted average	-87900
	Loss due to flooding	-319200
	Loss from operations of discontinued line of business	-420000	(4,676,400)
	Net Taxable Income		876,500
	Tax @30%		(262,950)
	Retained Earnings Statement
	Opening Balance		2,749,600
	Add: Net income		477,550
	Less: Dividends declared and paid		241750
	Closing balance		2,985,400

Operating Income to be reported is $ 952300/-

Income Tax expense reported for 2018 is $ 262950/-