Question

Larkspur Inc. reported income from continuing operations before taxes during 2017 of $2,300,000. Additional transactions occurring in 2017 but not considered in the $2,300,000 are as follows.

1. A gain of $122,000 (pretax) as a result of selling securities from its investment portfolio.

2. A $24,000 loss before taxes as a result of operating the discontinued clothing division during 2017.

3. A loss of $70,000 before taxes as a result of disposing of its clothing division. Assume that this transaction meets the criteria for discontinued operations.

4. An uninsured $122,000 loss due to a fire.

5. At the beginning of 2015, the corporation purchased a machine for $290,000 (salvage value of $40,000) that had a useful life of 10 years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, but failed to deduct the salvage value in computing the depreciation base.

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 $16,000 before taxes. The FIFO method has been used for 2017.

Prepare an income statement for the year 2017 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 450,000 shares. (Assume a tax rate of 30% on all items.) (Round earnings per share to 2 decimal places, e.g. 1.48 and all other answers to 0 decimal places, e.g. 5,275.)

Answer 1

Income given: $2300000

+ sale of securities : $122000

+ Depreciation rectified: $4000. {29000incorrect recorded earlier- 25000correct}

+Effect of stock valuation: $16000

Income before extraordinary item &discontinued operation: $2442000

-Extraordinary loss by fire: $122000

Income from continued operation: $2320000

Less: discontinued operation: (24000+70000)

Net income before tax: $2226000

Less: Tax @30%: $667800

Net income after tax: $1558200

No of share: 450000

EPS: $3.46/-

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