Question

The following income statement items appeared on the adjusted trial balance of Schembri Manufacturing Corporation for the year ended December 31, 2021 ($ in thousands): sales revenue, $15,700; cost of goods sold, $6,400; selling expenses, $1,320; general and administrative expenses, $820; interest revenue, $80; interest expense, $200. Income taxes have not yet been recorded. The company’s income tax rate is 25% on all items of income or loss. These revenue and expense items appear in the company’s income statement every year. The company’s controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2021 ($ in thousands). All transactions are material in amount.

1. Investments were sold during the year at a loss of $240. Schembri also had an unrealized gain of $360 for the year on investments in debt securities that qualify as components of comprehensive income.

2. One of the company’s factories was closed during the year. Restructuring costs incurred were $1,400.

3. During the year, Schembri completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP. The division had incurred a loss from operations of $580 in 2021 prior to the sale, and its assets were sold at a gain of $1,440.

4. In 2021, the company’s accountant discovered that depreciation expense in 2020 for the office building was understated by $220.

5. Negative foreign currency translation adjustment for the year totaled $260.

Required:

1. Prepare Schembri’s single, continuous multiple-step statement of comprehensive income for 2021, including earnings per share disclosures. One million shares of common stock were outstanding at the beginning of the year and an additional 400,000 shares were issued on July 1, 2021.

2. Prepare a separate statement of comprehensive income for 2021.

Answer 1

Solution

		Schembri Manufacturing Corporation
	Combined Statement of Income and Comprehensive Income for the year ended December 31, 2021 ($ in 000s)
Sales Revenue		$15,700
Cost of goods sold		$6,400
Gross profit		$9,300
Operating expenses:
Selling	$1,320
General and administrative	$820
Restructuring Costs	$1,400
Total operating expenses		$3,540
Operating income		$5,760
Other income/(expenses)
Interest revenue	$80
interest expense	($200)
loss on sale of investments	($240)
Other income/(expense)		($360)
Income from continuing operations before income taxes and extraordinary items		$5,400
Income tax expense		$1,350
Income from continuing operations before extraordinary item		$4,050
Discontinued operations:
income from operations of discontinued component	$860
Income tax expense	$215
Income/(loss) from discontinued operations		$645
Income before extraordinary item		$4,695
extraordinary item		Nil
Net Income		$4,695
Other Comprehensive Income:
Loss from foreign currency translation	($260)
Unrealized gains from investment	$360	$100
Comprehensive income		$4,795
Earnings per share:
income from continuing operations		$3.43	($4,795/1,400 thousand shares)
discontinued operations		$0.46	($645/1,400)
net income		$3.89

Notes:

1. Income from operations of discontinued component is as follows,

Loss from operations of the division -$580

Gain on sale of assets                                  $1,440

Income from operations of discontinued component = $860

2. The depreciation understatement pertains to the year 2020 and hence no effect is provided in the income statement of 2021.
3. Outstanding number of shares at Dec 31, 2021 are 1,000,000 + 400,000 = 1400 thousand.

1. Statement of comprehensive income:

Schembri Manufacturing Corporation
Statement of comprehensive income for the year ended Dec 31, 2021
Income from continuing operations		$4,050
Discontinued operations:
Income from operations of discontinued component	$860
(including gain on disposal $1,440)
(1,440 -580)
income tax expense	$215
Income from operations of discontinued component		$645
Net Income		$4,695

Note: income tax is calculated at 25%