Question

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

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 $48,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:

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 $50,000 in uninsured damages to the main office building. The fire was considered to be an unusual event.
2. Inventory that had cost $40,000 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 300,000 shares of outstanding common stock.

 

Answer 1

REED COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021		2020
Sales revenue ........................................................ [1]	$4,000,000		[6]       $3,000,000
Cost of goods sold ................................................ [2]	2,570,000		[7]           1,680,000
Gross profit ...........................................................	1,430,000		1,320,000
Operating expenses:
Administrative expense ...................................... [3]	750,000		[8]                 635,000
Selling expense ................................................... [4]	340,000		[9]                 282,000
Loss on building (fire damage) ............................	50,000		- -
Loss on inventory write-down ............................	35,000		- -
Total operating expenses .................................	1,175,000		917,000
Operating income ..................................................	255,000		403,000
Other income (expense):
Interest revenue ...................................................	150,000		140,000
Interest expense ...................................................	(200,000)		(200,000)
Total other income, net ...................................	(50,000)		(60,000)
Income from continuing operations before  income taxes....................................................	205,000		343,000
Income tax expense ..............................................	51,250		85,750
Income from continuing operations.......................	153,750		257,250
Discontinued operations:
Income (loss) from operations of discontinued  component (including loss on disposal of   $48,000 in 2021) ...............................................	(8,000)		120,000
Income tax benefit (expense)................................	2,000		(30,000)
Income (loss) on discontinued operations ............ [5]	(6,000)		90,000
Net income ............................................................	$ 147,250		$ 347,250
Earnings per share: Income from continuing operations .......................	$  0.51		$  0.86
Discontinued operations ........................................	(0.02)		0.30
Net income ............................................................	$  0.49		$ 1.16

        [1]   $4,400,000 – 400,000 (sales from discontinued operation)      

 

       [2]     $2,860,000 – 290,000 (cost of goods sold from discontinued operations)

 

       [3]     $800,000 – 50,000 (administrative expenses from discontinued operations)

 

       [4]     $360,000 – 20,000 (selling expenses from discontinued operations)

 

       [5] Loss in 2021:

             Income from operations                                                 $ 40,000

             Loss on sale of assets                                                       (48,000)

             Loss before tax benefit                                                      (8,000)

             Tax benefit (25% × $8,000)                                                  2,000

             Loss on discontinued operations, net of tax benefit $ (6,000)

 

       [6]     $3,500,000 – 500,000 (sales from discontinued operation)

 

       [7]     $2,000,000 – 320,000 (cost of goods sold from discontinued operations)

 

       [8]     $675,000 – 40,000 (administrative expenses from discontinued operations)

 

       [9]     $302,000 – 20,000 (selling expenses from discontinued operations)

$302,000 – 20,000 (selling expenses from discontinued operations