Question

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

		2018		2017
Sales	$	4,450,000	$	3,550,000
Cost of goods sold		2,870,000		2,010,000
Administrative expenses		810,000		685,000
Selling expenses		370,000		322,000
Interest revenue		151,000		141,000
Interest expense		202,000		202,000
Loss on sale of assets of discontinued component		54,000		—

On July 1, 2018, 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, 2018, for $54,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:

	1/1/18-9/30/18						2017
Sales		$	410,000				$	510,000
Cost of goods sold			(295,000	)				(326,000	)
Administrative expenses			(51,000	)				(41,000	)
Selling expenses			(21,000	)				(31,000	)
Operating income before taxes		$	43,000				$	112,000

In addition to the account balances above, several events occurred during 2018 that have not yet been reflected in the above accounts:

A fire caused $51,000 in uninsured damages to the main office building. The fire was considered to be an infrequent but not unusual event.

Inventory that had cost $41,000 had become obsolete because a competitor introduced a better product. The inventory was sold as scrap for $5,000.

Income taxes have not yet been recorded.

Required:
Prepare a multiple-step income statement for the Reed Company for 2018, showing 2017 information in comparative format, including income taxes computed at 40% and EPS disclosures assuming 400,000 shares of common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

Answer 1

Solution - Preparation of Income Statement

REED COMPANY

MULTIPLE INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31

Particulars	2018	2017
Sales	$4040000 ($4450000-$410000)	$3040000 ($3550000-$510000)
Less : Cost of Goods sold	$2575000 ($2870000-$295000)	$1684000 ($2010000-$326000)
Gross Profit (A)	$1465000	$1356000
Operating Expenses
Administrative expenses	$759000 ($810000-$51000)	$644000 ($685000-$41000)
Selling Expenses	$349000 ($370000-$21000)	$291000 ($322000-$31000)
Loss from fire damage	$51000	$0
Loss from write down of obsolete Inventory	$36000 ($41000-$5000)	$0
Total Operating Expenses (B)	$1195000	$935000
Operating Profit (A-B)	$270000	$421000
Non Operating Income and Expenses
Interest Expenses	($202000)	($202000)
Interest Revenue	$151000	($141000)
Total Other Expenses (Net)	$51000	$61000
Income From Continuing Operations before Taxes	$219000 ($270000-$51000)	$360000 ($421000-$61000)
Income Tax Expenses (40%)	$87600	$144000
Income From Continuing Operations	$131400	$216000
Discontinued Operations
Income/(loss) from discontinued operations ($54000-$43000)	($11000)	$112000
Income Tax benefit/(Expenses) (40%)	$4400	($44800)
Income/(loss) on discontinued Operations	($6600)	$67200
Net Income	$124800 ($131400 - $6600)	$283200 ($216000+$67200)
Earning Per Share Calculation
Income From continued operations	$0.33 ($131400/400000 shares)	$0.54 ($216000/400000 shares)
Discontinued Operations	($0.02) ($6600/400000 shares)	$0.17 ($67200/400000 shares)
Earning Per share	$0.31	$0.71