Question

Part III: Income Statement (18 points) Presented below is information related to Farr Company for the year 2019. 1,800,000 50,000 30,000 95,000 40,000 60,000 Sales revenue Dividend Revenue Interest Revenue Interest Expense Sales returns and allowances Sales discounts Selling expenses Administrative expenses Gain on sale of building Loss on operations of discontinued operations Gain on disposal of discontinued operations Cash dividends declared on common stock 230,000 95,000 130,000 90,000 200,000 33,600 780,000 52,000 40,000 Cost of goods sold Overstatement of revenues in 2016 Unrealized holding gain on available for sale securities Assume effective tax rate on all items is 20% and 85,000 shares of common stock were outstanding during the year. Instructions Compute each of the following for Farr Company. a. Income from operations (3 points) b. Income from continuing operations (4 points) c. Comprehensive Income (4 points) Farnings per share (3 points)

Answer 1

1. a. Income from operations

	Operating Income Calculation	Amount in $
	Gross Sales	1,800,000
Less	Sales Discounts	(60,000)
	Allowances	(40,000)
	Net Sales	1,700,000
Less	Cost of goods sold	(780,000)
	Gross Margin	920,000
Less	Operating Expenses
	Selling Expenses	(230,000)
	Administrative Expenses	(95,000)
	Operating Income	595,000

b. Income from Continuing operations

	Income from continuing operations	Amounts in $
	Operating Income	595,000
Add	Other Revenues & Gains
	Interest/ Dividend Income	80,000
	Gain on sale of equipment/ investments/ building	130,000
Less	Interest Expense	(95,000)
	Unusual or infrequent items	(52,000)
	Income from Continuing operations	658,000
Less	Provision for Income Tax (@20%)	(131,600)
	Income from Continuing operations (after Tax)	526,400

c. Comprehensive Income

	Income from Continuing operations (after Tax)	526,400
Add	Gain on disposal of discontinued operations (net of tax)	160,000
Less	Loss on operations of discontinued operations (net of tax)	(72,000)
	Net Income	614,400
	Other Comprehensive Income:
	Avaliable for sale security - Net unrealized holding gains	40,000
	Comprehensive Income	654,400

d. EPS:
From continuing operations = $526,400/ 85,000 shares = $6.19 per share
From discontinued operations = $88,000/ 85,000 shares = $ 1.04 per share

2.i.(a) Continuing operations - Since flood is a rare occurence , it will be classified as infrequent under Other Expenses under Income from Continuing operations.

ii.Prior Period Adjustment - Erroneous expensing of capital nature items in a previous year is a prior period item which requires prospective adjustment in the financial statements.