Question

Tony Rich Inc. reported income from continuing operations before taxes during 2008 of $790,000. Additional transactions occurring in 2008 but not considered in the $790,000 are as follows.

1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $80,000 during the year. The tax rate on this item is 46%.

2. At the beginning of 2006, 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 2006, 2007, and 2008 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 $110,000 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 2006 income by $60,000 and decrease 2007 income by $20,000 before taxes. The FIFO method has been used for 2008. The tax rate on these items is 40%.

Instructions

Prepare an income statement for the year 2008 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 80,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

Answer 1

As previously stated		$ 7,90,000
loss on sale of securities		$ (57,000)
Gain on Proceeds of Lie Insurance Policy (110000 - 46000)	$ 64000
Error in computation of depriciation
As computed (54000 / 6 )	$ 9,000
Corrected ( 54000 - 9000 /6)	$ 7,500	$ 1,500
As restated		$ 7,98500
computation of income tax
income from continuing operation before taxes	$ 7,98500
nontaxable income (gain on life insurance)		$ (64000)
taxable income		$ 734500
Tax rate 30%		$ 30%
Income Tax expense		$ 220350

Tony Rich Inc Income Statement (Partial) For the Year Ended December 31, 2004
Income from continuing operations before income tax		798500
Income tax		(220350)
Income from continuing operations		578150
Discontinued operations
Loss from disposal of recreational division	115000
Less: Applicable income tax reduction 115000*30%	34500	(80500)
Income before extraordinary item		497650
Extraordinary item:
Major casualty loss	80000
Less: Applicable income tax reduction 80000*46%	(36800)	(43200)
Net income		454450

Per Share of common stock
Income from continuing operation ($578150/80000 shares)	7.23
Discontinued Operations Net of tax ($123700/80000 shares)	-1.55
Net Income ($454450/ 80000 shares)		5.68

As previously stated		$ 7,90,000
loss on sale of securities		$ (57,000)
Gain on Proceeds of Lie Insurance Policy (110000 - 46000)	$ 64000
Error in computation of depriciation
As computed (54000 / 6 )	$ 9,000
Corrected ( 54000 - 9000 /6)	$ 7,500	$ 1,500
As restated		$ 7,98500