Question

Treasure Corp. is a public company and has 100,000 common shares outstanding and 15,000 cumulative $2 preferred shares outstanding. In 2020, the company reported income from continuing operations before income tax of $2,830,000. Additional transactions not considered in the $2,830,000 are as follows: 1. In 2020, Treasure Corp. sold equipment for $65,000. The machine had originally cost $60,000 and had accumulated depreciation to date of $45,000. 2. The company sold one of its subsidiaries during the current year. Assume that this transaction meets the criteria for discontinued operations. The loss on 2020 operations of this subsidiary was $60,000 before tax. The loss from disposal of the subsidiary was $7,000 before tax. 3. Treasure purchased new computers for $20,000 cash at the end of 2020 to take advantage of a supplier promotion. By doing so, the company saved $4,000. 4. At year end, the company reviewed its accounts receivable and determined that a $6,700 of accounts receivable that had been outstanding since May appeared unlikely to be collected. No allowance for doubtful accounts was previously set up. 5. An internal audit discovered that amortization (depreciation) expense on a patent had been erroneously missed for both 2019 and 2020. The patent had a cost of $120,000 and has an 8-year useful life. 6. The company had an unrealized gain of $41,000 (not taxable) on their FV-OCI investment. Instructions: a. Make a list with one to six and for each of the 6 points, indicate if the transaction would effect Continuing Operations, Discontinued Operations, Other Comprehensive Income or N/A and by what before-tax amount, positive or negative. E.g. “8. Discontinued +53,000” b. Taking into account the above information, prepare a Statement of Financial Performance for the year 2020, starting with income from continuing operations before income tax. Calculate earnings per share as it should be shown on the face of the income statement (The preferred share dividends are $30,000). Assume a total effective tax rate of 30% on all points, unless otherwise indicated. c. Not all information is created equal. Using an example from the information provided in points 1 through 6, explain how the quality of earning information could have shortcomings. Be clear but concise and limit your answer to two to three sentences.

Answer 1

Particular	Amount(Dollars)
Income before tax & adjustment	2830000
Add: Profit on sale of Equipment (#1)	50000
Less : Loss on operation of subsidary company	(60000)
Less : Loss from disposal of subsidary company	(7000)
Less: Loss from accounts receivable become bad debts	(6700)
Less : Amortization Expenses (#2)	(30000)
Income before Tax	2676300
Less : Tax (30%)	802890
Income After Tax	1873410
Add : Unrealise Gain	41000
Total Earning after tax	1914410

Earning Available for shareholder => 1914410

Earning available for Equity shareholder => Earning Available for shareholder - Preference Dividend

= > 1914410 - 30000

= > 1884410

Earning Per Share = > Net profit after tax and preference Dividend

   Total Equity Share

Therefore :

Earning Per Share = > 1884410 /100000

= > 18.84 per share ( approx)

= > 19 $ per share

#1

originally cost = > $60,000

Accumulated depreciation => 45000

Value of assest => originally cost - accumulated depreciation

=> 60000-45000

= > 15000

Profit /Loss of assest = > sales vale - value of assest after adjustment of depreciation

=> 65000-15000

=> 50000

(# 2)

Assume that stright Line Method has been followed

Depreciation on assest => Original value of asset / Useful life of assest

=> 120000/8

Depreciation Per Year   = > 15000

Depreciation for two years = > 15000*2 ( for 2019 & 2020)
= > 30000