Question

Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31): Sales revenue Cost of goods sold Administrative expense Selling expense Interest revenue Interest expense Loss on sale of assets of discontinued component 2021 $4,950,000 2,970,000 910,000 470,000 161,000 222,000 92,000 2020 $4,050,000 2,110,000 785,000 412,000 151,000 222,000 On July 1, 2021, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2021, for $92,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows: Sales revenue Cost of goods sold Administrative expense Selling expense Operating income before taxes 1/1/2021–9/30/2021 $ 510,000 (345,000) (61,000) (31,000) $ 73,000 2020 $ 610,000 (386,000) (51,000) (31,000) $ 142,000 In addition to the account balances above, several events occurred during 2021 that have not yet been reflected in the above accounts: 1. A fire caused $61,000 in uninsured damages to the main office building. The fire was considered to be an unusual event. 2. Inventory that had cost $51,000 had become obsolete because a competitor introduced a better product. The inventory was written down to its scrap value of $5,000. 3. Income taxes have not yet been recorded. Required: Prepare a multiple-step income statement for the Reed Company for 2021, showing 2020 information in comparative format, including income taxes computed at 25% and EPS disclosures assuming 400,000 shares of outstanding common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

Answer 1

Answer -

Reed Company
Comparative Income Statement
For the Year Ended December 31
	2021	2020
Sales revenue	$4440000	$3440000
Cost of goods sold	($2625000)	($1724000)
Gross profit (loss)	$1815000	$1716000
Operating expenses:
Administrative	($849000)	($734000)
Selling	($439000)	($381000)
Loss from fire damage	($61000)	$0
Loss from write-down of obsolete inventory	($46000)	$0
Total operating expenses	($1395000)	($1115000)
Operating income	$420000	$601000
Other income (expense):
Interest revenue	$161000	$151000
Interest expenses (net)	($222000)	($222000)
Total other income (expense), net	($61000)	($71000)
Income from continuing operations before income taxes	$359000	$530000
Income tax expense	($89750)	($132500)
Income from continuing operations	$269250	$397500
Discontinued operations gain (loss):
Income (loss) from operations of discontinued component	($19000)	$142000
Income tax benefit (expense)	$4750	($35500)
Income (loss) on discontinued operations	($14250)	$106500
Net income (loss)	$255000	$504000
Earning per share:
Income from continuing operations	$0.67	$0.99
Discontinued operations	($0.04)	$0.27
Net income (loss)	$0.64	$1.26

Calculation:

Year 2021:

1. Sales revenue:

= $4950000 - $510000

= $4440000

2. Cost of goods sold:

= $2970000 - $345000

= $2625000

3. Gross profit:

= Sales revenue - Cost of goods sold

= $4440000 - $2625000

= $1815000

4. Administrative expenses:

= $910000 - $61000

= $849000

5. Selling expenses:

= $470000 - $31000

= $439000

6. Loss from write-down of obsolete inventory:

= Cost of obsolete inventory - Value of write-down of obsolete inventory

= $51000 - $5000

= $46000

7. Total operating expenses:

= Administrative expenses + Selling expenses + Loss from fire damage + Loss from write-down of obsolete inventory

= $849000 + $439000 + $61000 + $46000

= $1395000

8. Operating income:

= Gross profit - Total operating expenses

= $1815000 - $1395000

= $420000

9. Total other expenses, net:

= Interest revenue - Interest expense

= $161000 - $222000

= $61000

10. Income from continuing operations before income taxes:

= Operating income - Total other expenses, net

= $420000 - $61000

= $359000

11. Income tax expense:

= Income from continuing operations before income taxes * 25%

= $359000 * 25%

= $89750

12. Income from continuing operations:

= Income from continuing operations before income taxes - Income tax expense

= $359000 - $89750

= $269250

13. Loss from operations of discontinued component:

= Operating income before taxes - Loss on sale of assets of discontinued component

= $73000 - $92000

= $19000

14. Income tax benefits (expense):

= Loss from operations of discontinued component * 25%

= $19000 * 25%

= $4750

15. Loss on discontinued operations:

= Loss from operations of discontinued component - Income tax benefit

= $19000 - $4750

= $14250

16. Net income:

= Income from continuing operations - Loss on discontinued operations

= $269250 - $14250

= $255000

17. Income from continuing operations (EPS):

= Income from continuing operations / Common stock outstanding

= $269250 / 400000 shares

= $0.67

18. Loss on discontinued operations (EPS):

= Loss on discontinued operations / Common stock outstanding

= $14750 / 400000 shares

= $0.04

19. Net income (EPS):

= Net income / Common stock outstanding

= $255000 / 400000 shares

= $0.64

Year 2020:

1. Sales revenue:

= $4050000 - $610000

= $3440000

2. Cost of goods sold:

= $2110000 - $386000

= $1724000

3. Gross profit:

= Sales revenue - Cost of goods sold

= $3440000 - $1724000

= $1716000

4. Administrative expenses:

= $785000 - $51000

= $734000

5. Selling expenses:

= $412000 - $31000

= $381000

6. Total operating expenses:

= Administrative expenses + Selling expenses + Loss from fire damage + Loss from write-down of obsolete inventory

= $734000 + $381000 + $0 + $0

= $1115000

8. Operating income:

= Gross profit - Total operating expenses

= $1716000 - $1115000

= $601000

9. Total other expenses, net:

= Interest revenue - Interest expense

= $151000 - $222000

= $71000

10. Income from continuing operations before income taxes:

= Operating income - Total other expenses, net

= $601000 - $71000

= $530000

11. Income tax expense:

= Income from continuing operations before income taxes * 25%

= $530000 * 25%

= $132500

12. Income from continuing operations:

= Income from continuing operations before income taxes - Income tax expense

= $530000 - $132500

= $397500

13. Income from operations of discontinued component:

= Operating income before taxes - Loss on sale of assets of discontinued component

= $142000 - $0

= $142000

14. Income tax benefits (expense):

= Income from operations of discontinued component * 25%

= $142000 * 25%

= $35500

15. Income on discontinued operations:

= Income from operations of discontinued component - Income tax benefits

= $142000 - $35500

= $106500

16. Net income:

= Income from continuing operations + Income on discontinued operations

= $397500 + $106500

= $504000

17. Income from continuing operations (EPS):

= Income from continuing operations / Common stock outstanding

= $397500 / 400000 shares

= $0.99

18. Income on discontinued operations (EPS):

= Income on discontinued operations / Common stock outstanding

= $106500 / 400000 shares

= $0.27

19. Net income (EPS):

= Net income / Common stock outstanding

= $504000 / 400000 shares

= $1.26