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    Income Statement for Tony Rich Inc: Irregular Items

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    Tony Rich Inc. reported income from continuing operations before taxes during 2007 of $790,000. Additional transactions occurring in 2007, but not considered in the $790,000 are as follows:

    1) The corporation experienced an uninsured flood loss (extraordinary) in the amount of $80,000 during the year. the tax rate on the item is 46%.

    2) At the beginning of 2005, the corporation purchased a machine for $54,000 (salvage value of $9000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2005-2007, but failed to deduct the salvage value in computing the depreciation base.

    3) Sale of securities held as a part of its portfolio resulted in a loss of $57000 (pretax).

    4) When its president died, the corporation realized $110000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46000 9th gain is nontaxable)

    5) The corporation disposed of its recreational division at a loss of $115000 before taxes. Assume that this transaction meets the criteria for discontinued operations.

    6) The corporation decided to change its method of inventory pricing from average cost to FIFO method. The effect of this change on prior years is to increase 2005 income by $60,000 and decrease 2006 by $20000 before taxes. The FIFO method has been used for all of 2007. The tax rate on these items is 40%.

    Instructions: Prepare an income statement for the year 2007 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 80,000 shares. (Assume a tax rate of 30% on all items unless indicated otherwise).

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    Solution Preview

    Please see the attached file.

    Income Statement (Partial)
    For the Year Ended December 31, 2007
    Income from continuing operations before taxes $798,500 Please see the computation below
    Income Taxes 220,350 Please see the computation below
    Income from continuing operations 578,150
    Discontinued operations:
    Loss from disposal of recreational division $115,000
    Less applicable income tax reduction 34,500 80,500
    Income before extraordinary item ...

    Solution Summary

    The following solution explains how to account for irregular items and adjust these in the income statement. This information is all provided in an attached Excel file for easier formatting, but is also readable from the plain text box.