Question

7.

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.)

REED COMPANY
Comparative Income Statements
For the Years Ended December 31
	2018	2017
Sales revenue
Cost of goods sold
Gross profit (loss)
Operating expenses:
Administrative
Selling
Loss from fire damage
Loss from write-down of obsolete inventory
Total operating expenses
Operating income
Other income (expense):
Interest revenue
Interest expense
Total other expenses (net)
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Discontinued operations:
Income (loss) from operations of discontinued component
Income tax benefit (expense)
Income (loss) on discontinued operations
Net income
Earnings per share:
Income from continuing operations
Discontinued operations
Net income

Answer 1