Question

Maher Inc. reported income from continuing operations before taxes during 2020 of $790,000. Additional transactions occurring in 2020 but not used in computing the $790,000 are as follows. > Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax). > When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000. The gain is nontaxable. > The corporation experienced an uninsured flood loss in the amount of $90,000 during the year. > At the beginning of 2020, the corporation purchased a machine for $54,000 (salvage value of $9,000). The machine had a useful life of 6 years and is depreciated straight-line. The bookkeeper failed to deduct the salvage value in computing the depreciation base. > The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. Prepare an income statement for the year 2020 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 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.) Computation of income from continuing operations before taxes: As previously stated Loss on sale of securities $ 790,000 Gain on proceeds of life insurance policy Flood loss Error in computation of 2020 depreciation: As computed Corrected As restated Computation of income tax: Income from continuing operations before taxes Nontaxable income again on life insurance) Taxable income Tax rate Income tax

Answer 1

Computation of income from cont. operations before taxes:
As previous stated	$            790,000
Loss on sale of securities	$            (57,000)
Gain on proceeds of life insurance ( 150,000 - 46,000)	$            104,000
Error in computation of depreciation
As computed (54,000 /6)                                             9000
Corrected (54000-9000)/6                                           (7500)	$                 1,500
As restated	$            838,500

Computation of income tax
Income from continuing operations before taxes	$            838,500
Nontaxable income (gain on life insurance)	$          (104,000)
Taxable income	$            734,500
Tax rate	30%
income tax expense	$            220,350

Note that no adjustment is needed for the inventory method change, since the new method is reported in 2020 income. The cumulative effect on prior years of retroactive application of the new inventory method will be recorded in retained earnings.

                                                                MAHER INC

                                                                Income statement (partial)

Income from continuing operations
before income tax		$        838,500
income tax		$       ( 220,350 )
Income from continuing operations		$        618,150
Discontinued operations
Loss from disposal of recreational division	$            115,000
Less: Applicable income tax reduction	$             ( 34,500 )	$          80,500
Income before extraordinary item		$        537,650
Extraordinary item
Major casualty loss	$              90,000
Less: Applicable income tax reduction	$             ( 41,400 )	$          48,600
Net income		$        489,050
Per share of common stock
Income from continuing operations (618,510/120,000)		5.15
Discontinued operations, net of tax (80,500/120,000)		(0.67)
Income before extraordinary items		4.48
Extraordinary item, net of tax (48,600/120,000)		(0.4)
Net income		4.08

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