Question

At the beginning of 2020, Cameron Company's retained earnings was $212,000. For 2020, Cameron has calculated its pretax income from continuing operations to be $120,000. During 2020, the following events also occurred:

1. During July, Cameron sold Division M (a component of the company). The book values of Division M’s assets and liabilities are $300,000 and $100,000, respectively, at the time of

sale. The company sold Division M for cash $159,500. During 2020 before its sale, Division M recognized revenues of 100,000 and expenses of 61,000 (excluding income tax expense).

2. Cameron had 21,000 shares of common stock outstanding during all of 2020. It declared and paid a $1 per share cash dividend on this stock.

3. Cameron also paid $7,500 cash dividend to its preferred stockholders.

Required:

Assuming that all the “pretax” items are subject to a 21% income tax rate:

1. Complete the lower portion of Cameron's 2020 income statement, beginning with “Pretax

Income from Continuing Operations.”

2. Prepare an accompanying retained earnings statement.

Answer 1

Income statement shows the income earned and expenses incurred during the year. This is used to determine the profitability of business.
CAMERON COMPANY
PARTIAL INCOME STATEMENT
For the year ended December 2020
Pretax income from continuing operations		$120,000
Tax @ 21%		-$25,200
Income from continuing operations		$94,800
Discontinued operations gain (loss):
Income from operation of discontinued component	$39,000
Loss from sale of discontinued component	-$40,500
Net loss from discontinued component	-$1,500
Income tax benefit	$315
Loss on discontinued operations		-$1,185
Net income		$93,615
Earnings per share
Income from continuing operations		$4.51	(94800/21000)
Loss on discontinued operations		-$0.06	(-1185/21000)
Net income		$4.46	93615/21000
Net income from operation of discontinued component
Revenue	$100,000
Less: Expenses	$61,000
Net income	$39,000
Loss from sale of discontinued component
Sale proceeds received	159500
Book value of component (300000-100000)	200000
Loss from sale of discontinued component	-40500
Retained earnings statement which shows changes in retained earnings during the year is shown below
CAMERON COMPANY
Statement of Retained earnings
For the year ended December 2020
Retained earnings, Jan 1	$212,000
Add: Net income	$93,615
	$305,615
Less: Dividends (21000+7500)	$28,500
Retained earnings, Dec 31	$277,115