Question

P4-4 Wavecrest Inc. reported income from continuing operations before tax of $1,790,000 during 2017. Additional transactions occurring in 2017 but not included in the $1,790,000 are as follows: 1.The corporation experienced an insured flood loss of $80,000 during the year. 2.At the beginning of 2015, the corporation purchased a machine for $54,000 (residual value of $9,000) that has a useful life of six years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, but failed to deduct the residual value in calculating the depreciable amount. 3.The sale of FV-NI investments resulted in a loss of $107,000. 4.When its president died, the corporation gained $100,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is non-taxable). 5.The corporation disposed of its recreational division at a loss of $115,000 before tax. Assume that this transaction meets the criteria for accounting treatment as 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 $60,000 and decrease 2016 income by $20,000 before taxes. The FIFO method has been used for 2017. Instructions (a) Prepare an income statement for the year 2017, starting with income from continuing operations before income tax. Calculate earnings per share as required under IFRS. There were 80,000 common shares outstanding during the year. (Assume a tax rate of 30% on all items, unless they are noted as being non-taxable.) (b) Assume that beginning retained earnings for 2017 is $2,540,000 and that dividends of $175,000 were declared during the year. Prepare the retained earnings portion of the statement of changes in equity for 2017. (c) Discuss how proper classification and disclosure of items on the income statement help users in making their investment and credit decisions.

Answer 1

wavercrest Inc.
Income statement(partial)
For the year ended dec 31 2017
Income from continuing operations before income tax		1658500
Income tax		481350
Income form continuting oeprations		1177150
Discontinued operations
Loss from disposal of recreational division	115000
Less:applicable income tax reduction(30%*115000)	34500	-80500
Net Income		1096650
Earning per share
Income from continuing operations		14.71
(1177150/80000)
Dicontinued operations,net of tax		(1.01)
Net Income		13.71
(1096650/80000)
Note:
Income before taxes		1790000
Loss on sale of securities		-107000
Gain on sale proceeds of life insurance
(100000-46000)		54000
Flood loss		-80000
Error in computation of depreciaition
As computed(54000/6)=	9000
corrected(54000-9000)/6	-7500	1500
As restated		1658500
Computation of income tax
Income from continuting opeations before taxes		1658500
Nontaxable income(Gain on life insurance)		-54000
Taxable income		1604500
Tax rate		30%
Income tax		481350
Note:ne need for adjustment of inventory metho change
since the new method is reported in 2017 income
Ques 2
Statement of retianed earnings
oepning balance		2540000
Add:net income		1096650
Less:dividends		-175000
closing balance		3461650
ques 3
a potential investor when making a right choice to invest , apart from looking at
other parameters like EPS , PROFIT AND DIVIDENDS is also looks for any
extraordinary items in financial statements
so separate line items are required in the income statement to make
the investor aware of the other activities an entity has ventured into , and what
was its result a profit or loss
hence classification and labelling becomes relevant
like say a company sold machine , which was its main manufacutring item
so this has to be made clear on the statements so that investor knows
that a machine has been sold to make further enquiries to make a right
and informative choice