Question

6.

Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31):

		2021		2020
Sales revenue	$	5,300,000	$	4,400,000
Cost of goods sold		3,040,000		2,180,000
Administrative expense		980,000		855,000
Selling expense		540,000		482,000
Interest revenue		168,000		158,000
Interest expense		236,000		236,000
Loss on sale of assets of discontinued component		120,000		—

On July 1, 2021, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2021, for $120,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:

	1/1/2021–9/30/2021						2020
Sales revenue		$	580,000				$	680,000
Cost of goods sold			(380,000	)				(428,000	)
Administrative expense			(68,000	)				(58,000	)
Selling expense			(38,000	)				(38,000	)
Operating income before taxes		$	94,000				$	156,000

In addition to the account balances above, several events occurred during 2021 that have not yet been reflected in the above accounts:

1. A fire caused $68,000 in uninsured damages to the main office building. The fire was considered to be an unusual event.
2. Inventory that had cost $58,000 had become obsolete because a competitor introduced a better product. The inventory was written down to its scrap value of $5,000.
3. Income taxes have not yet been recorded.

Required:
Prepare a multiple-step income statement for the Reed Company for 2021, showing 2020 information in comparative format, including income taxes computed at 25% and EPS disclosures assuming 600,000 shares of outstanding common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

Answer 1

REED COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021	2020
Sales revenue	4720000	3720000
Cost of goods sold	-2660000	-1752000
Gross profit (loss)	2060000	1968000
Operating expenses:
Administrative	-912000	-797000
Selling	-502000	-444000
Loss from fire damage	-68000	0
Loss from write-down of obsolete inventory	-53000	0
Total operating expenses	-1535000	-1241000
Operating income	525000	727000
Other income (expense)
Interest revenue	168000	158000
Interest expense	-236000	-236000
Total other expenses (net)	-68000	-78000
Income from continuing operations before income taxes	457000	649000
Income tax expense	-114250	-162250
Income from continuing operations	342750	486750
Discontinued operations:
Income (loss) from operations of discontinued component	-26000	156000
Income tax benefit (expense)	6500	-39000
Income (loss) on discontinued operations	-19500	117000
Net income	323250	603750
Earnings per share:
Income from continuing operations	0.57	0.81
Discontinued operations	-0.03	0.20
Net income	0.54	1.01