Question

Selected information from the December 31, Year 3, trial balance of Pitt Corp. follows: Debit Credit Common stock $1,250,000 Additional paid-in capital 2,187,500 Retained earnings, January 1, Year 4 1,650,000 Net sales 6,250,000 Cost of sales $3,750,000 Selling and administrative expenses 1,212,500 Interest expense 122,500 Gain on extinguishment of debt 130,000 Loss on sale of equipment 225,000 Loss due to earthquake damage 700,000 Pitt uses U.S. GAAP. Other financial data for the year ended December 31, Year 3: • In September, Year 3, one of Pitt's operating plants was destroyed by an earthquake. Earthquakes are rare in the area in which the plant was located. The portion of the resultant loss not covered by insurance was $700,000. • On October 1, Year 3, Pitt Corp. committed itself to a formal plan to sell its Kam Division's assets early in Year 4. On that date, Pitt estimated that the fair value of the component's assets was $25,000 less than the carrying value. Pitt also estimated that Kam would incur operating losses of $100,000 for the year-ended December 31, Year 3 and $50,000 for the period January 1, Year 4, through February 28, Year 4. All estimates proved to be materially correct. • Pitt Corp. bought a truck in January of Year 1 for $180,000. The truck was expected to have a ten-year useful life and no salvage value. During Year 3, Pitt Corp. realized that the truck would only have a total useful life of 5 years. The truck is being depreciated using the straight-line method. The depreciation expense (on the truck) to be included in selling and administrative expenses has not yet been recorded. • The company has an ongoing policy of retiring long-term debt. • Pitt Corp. had unrealized gains of $10,000 on available-for-sale securities during the current year. • Pitt Corp's pension plan recorded prior service cost of $6,000 during Year 3 due to plan amendments. • Pitt's effective income tax rate is 30%. Complete the following income statement. Double-click on the shaded cells in Column A and select the appropriate account from the list provided. Enter the appropriate amount in the shaded cells in Column B. Numbers to be subtracted must be entered as negative numbers. A B 1 Net sales $6,250,000 2 Cost of sales ($3,750,000) 3 4 5 Selling and administrative expenses 6 Operating income $0 7 8 Other income and expenses: 9 Interest expense ($122,500) 10 11 Other gains and losses: 12 Loss on sale of equipment ($225,000) 13 14 15 16 Income before income tax 17 Income tax expense 18 Income from continuing operations 19 20 21 Net income $0

Answer 1

Income Statement

Net sales.......................... .................................. $6,250,000

Cost of sales...................................................... (3,750,000)

Gross profit..................……………............................ 2,500,000

Selling and administrative expenses................. (1,260,500) [A]

Operating income....……......................................... 1,239,500

Other income (and expenses):

Interest expense...................................................... (122,500)

Other gains (and losses):

Loss on sale of equipment....................................... (225,000)

Gain on extinguishment of debt............................... 130,000 [B]

Loss due to earthquake damage................................. (700,000) [C]

Income before income tax............................................ 322,000

Income tax expense [322,000 x 30%].......................... (96,600)

Income from continuing operations............................ 225,400

Income (loss) from discontinued operations............ (87,500) [D]

Net income................................................................... $137,900

[A] "Revised" selling and administrative expenses: $1,260,500

$180,000 cost / 10 year life = 18,000 per year depreciation

x 2 years

= 36,000 accumulated depreciation

$144,000 (180000-36000) book value / Remaining life 3 years = 48,000

Selling and administrative expense...... 1,212,500

Revised depreciation expense ..............48,000

Total................. .................................. 1,260,500

[B] Gain on extinguishment of debt: $130,000

The gain on extinguishment of debt would be reported in income from continuing operations, NOT net of tax.

[C] Loss due to earthquake damage: ($700,000) The earthquake is an ordinary item and is reported pretax.

[D] Income (loss) from discontinued operations: ($87,500) Impairment loss of component's assets.......... (25,000)

Component's Year 3 net losses........................... (100,000)

Total losses on discontinued component............ (125,000)

Tax savings [30% x $125,000]................................. 37,500

Loss from discontinued operations....................... $(87,500)