Question

Income Statement and Retained Earnings

The Huff Company presents the following partial list of account balances taken from its December 31, 2019 adjusted trial balance:

Sales (net)	$123,000			Operating expenses	$26,000
Interest expense	3,000			Common stock, $5 par	5,500
Cost of goods sold	62,000			Retained earnings, 1/1/2019	42,500

The following information is also available for 2019 and is not reflected in the preceding accounts:

1. The common stock has been outstanding all year. A cash dividend of $1.62 per share was declared and paid.
2. Land was sold at a pretax gain of $5,900.
3. Division X (a major component of the company) was sold at a pretax gain of $4,670. It had incurred a $9,420 pretax operating loss during 2019.
4. A tornado, which is an unusual event in the area, caused a $5,320 pretax loss.
5. The income tax rate on all items of income is 30%.
6. The average shareholders' equity is $90,000.

Required:

1. Prepare a 2019 multiple-step income statement for Huff. Round earnings per share computations to two decimal places.

HUFF COMPANY
Income Statement (Multi-Step)
For Year Ended December 31, 2019
		$
		$
		$
Other items
	$
		$
		$
Results from discontinued operations
	$
		$
Components of Income		Earnings per Common Share
		$
		$

2. Prepare a 2019 retained earnings statement.

HUFF COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2019
	$
	$
	$

3. Compute the 2019 return on common equity. Round to one decimal place.

Answer 1

1. Income Statement

HUFF COMPANY
Income Statement (Multi-Step)
For Year Ended December 31, 2019
Particulars		Amount $
Sales (net)		123,000
Cost of Goods Sold		-62,000
Gross Profit		61,000
Operating expenses		-26,000
Operating Income		35,000
Other Items:
Gain on sale of land	5,900
Loss caused by Tornado	-5,320
Interest Expenses	-3,000	-2,420
Pre-tax Income from Continuing Operations		32,580
Income Tax @ 30% (32,580 * 30%)		-9,774
Income from Continuing Operations		22,806
Results from Discontinued Operations:
Loss from operation of discontinued division X (net of tax)	-6,594
(Loss: 9420 - Tax: (9420 * 30%))
Gain on disposal of Division X (net of tax)	6,071
(Gain: 4670 + Tax: (4670 * 30%))		-523
Net Income		22,283

There is a pre-tax loss from discontinued operations is $ 9,420. So, tax is deducted from that and our loss is decreased by the value of tax amount. Hence, it can be said that there is tax-benefit on loss.

There is a pre-tax gain on disposal of Division X (major component of the company) is of $ 4,670. So we have to pay tax thereon so tax value is added in gain. Hence, it can be said that our income is increased by the value of tax.

Common Stock	5,500
Per Stock, Par Value	5
Number of Stock (5,500 / 5)	1,100

Components of Income	Earning Per Common Share
Income from Continuing Operations (22,806 / 1100)	20.73
Results from Discontinued Operations (-523 / 1100)	-0.48
Net Income	20.26

2. Retained Earning Statement

HUFF COMPANY
Statement Of Retained Earnings
For year Ended December 31,2019
	Particulars	Amount $
Add	Retained Earning as on 01/01/2019	42,500
	Net Income	22,283
Less		64,783
	Cash Dividend (1.62 * 1100)	-1,782
	Retained Earning as on 31/12/2019	63,001

3. Return on Common Equity

Net Income	22,283
Average shareholders equity	90,000
Return on common equity (22,283 / 90,000)	24.8%