Question

Vanpop Inc. reported income from continuing operations before taxes during 2017 of $463,000. Additional transactions occurring in 2017 but not considered in the $463,000 are as follows:

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

2. At the beginning of 2015, 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 2015, 2016 and 2017 but incorrectly used a 7 year useful life in determining the depreciation amount.

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 2015 income by $86,000 and increase 2016 income by $43,000 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40%.

Instructions

Prepare an income statement for the year 2017 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 :

Vanpop Inc

Income Statement (Partial)

For the year ended December 31.2020.

Particulars	Amount ($)	Amount ($)
Income from continuing operations before incomem tax (wn 1)	-	4,65,400
Income tax ( Working notes 2)	-	1,12,620
Income from continuing operations	-	3,52,780
Discontinued operations	-	-
Loss from disposal of recreational division	2,10,000	-
Less : Applicable income tax reduction	63,000	1,47,000
Net income		2,05,780
Earning per share	-	-
Income from continuing operations [$3,52,780 / 200,000]	1.76	-
Discountinued operations, net of tax [$1,47,000 / 200,000]	0.73	-
Net income [ $2,05,780 / 200,000]	1.03	-

Working Note 1

Particulars	Amounts
Reported income	4,63,000
Add : Gain on security	40,000
Gain on insurance policy on death of chairmen [$5,00,000 - $4,10,000]	90,000
Depreciation wrongly charged [$62,000 - $6000]/7	8,000
Less : Uninsured Haricane loss	1,30,000
Correct depreciation [$62,000 - $6000]/10	5,600
Income from continuing operations before income tax	4,65,400

Working Note 2

Income Tax

Particulars	Amount
Income from continuing operatations before income tax	4,65,400
Less : Gain on insurance policy on death of chairmaen	90,000
Taxable income	3,75,400
Tax @ 30%	1,12,620