Question

Pop Inc. reported income from continuing operations before taxes during 2020 of $463,000.

Additional transactions occurring in 2020 follows:

1. The corporation experienced an uninsured hurricane loss in the amount of $130,000 during the year.

2. At the beginning of 2018, the corporation purchased equipment for $62,000 (salvage value of $6,000) that had a useful life of 10 years. The bookkeeper used straight-line depreciation for 2018, 2019, and 2020 but incorrectly used a 7 year useful life in determining the deprecation amount. (treat this error as a prior period adjustment)

3. Sale of securities held as a part of its portfolio resulted in a gain of $40,000 (pretax).

4. When its chairman of the board died, the corporation realized $500,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $410,000 (the gain is nontaxable).

5. The corporation disposed of its consumer division at a loss of $210,000 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 2018 income by $86,000 and increase 2019 income by $43,000 before taxes. The FIFO method has been used for 2020. The tax rate on these items is 30%.

Instructions: Prepare an income statement in good form for the year 2020, 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 200,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

Answer 1

Answer :-

Income Statement (Partial)
For the Year ended December 31, 2020
Income From continuing Operations Before income tax [wk note 1 ]		$383,600
Income tax ( Wrk note 2)		$91,080
Income from continuing operations		$292,520
Discontinued operations
Loss from disposal of recreational division	$210,000
Less: Applicable income tax reduction($210,000*30%)	$63,000	$147,000
Net income		$145,520
Earning per share [$292,520/200,000]
Income from continuing operations	$ 1.46
Discontinued operations, net of tax	$ 0.74
Net income	$ 0.72

Working note

1.

[$463,000 - $130,000 - $40,000 + ($500,000 - $410,000)] = $383,000

Diff in depreciation = [$62,000 / 10] - [ ($62,000 -$6,000) / 10 ] = $600

income from continuing operations = $383,000+$600= $383,600.

2.

Computation of income tax:
Income from continuing operations before taxes	$383,600
Nontaxable income (gain on life insurance) ($500,000 - $410,000 )	($90,000)
Taxable income	$303,600
Tax rate	30%
Income tax expense	$91,080