Question

Problem 4-3

Maher Inc. reported income from continuing operations before taxes during 2014 of $816,100. Additional transactions occurring in 2014 but not considered in the $816,100 are as follows.

1.		The corporation experienced an uninsured flood loss (extraordinary) in the amount of $97,300 during the year. The tax rate on this item is 46%.
2.		At the beginning of 2012, the corporation purchased a machine for $59,400 (salvage value of $9,900) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2012, 2013, and 2014 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 $57,500 (pretax).
4.		When its president died, the corporation realized $164,200 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $49,800 (the gain is nontaxable).
5.		The corporation disposed of its recreational division at a loss of $120,600 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 the FIFO method. The effect of this change on prior years is to increase 2012 income by $60,330 and decrease 2013 income by $20,450 before taxes. The FIFO method has been used for 2014. The tax rate on these items is 40%.

Prepare an income statement for the year 2014 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 120,400 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.) (Round earnings per share to 2 decimal places, e.g. 1.48 and all other answers to 0 decimal places, e.g. 5,275.)

MAHER INC. Income Statement (Partial) For the Year Ended December 31, 2014

Answer 1

MAHER INC. Income Statement (Partial) For the Year Ended December 31, 2014
Income from continuing operations before income tax		874,650
Income tax		(228,075)
Income from continuing operations		646,575
Discontinued operations
Loss from disposal of recreational division	120,600
Less: Applicable income tax reduction 120600*30%	36,180	84,420
Income before extraordinary item		562,155
Extraordinary item:
Major casualty loss	97,300
Less: Applicable income tax reduction 97300*46%	(44,758)	52,542
Net income		509,613
No. of shares		120,400
Earnings per share		4.23

a
Computation of income from continued operations before taxes:
As previously stated		816,100
Loss on sale of securities		(57,500)
Gain on proceeds of life insurance policy ($164,200 – $49,800)		114,400
Error in computation of depreciation
As computed ($59,400 ÷ 6)	9,900
Corrected (($59,400 – $9,900) ÷ 6)	8,250	1,650
As restated		874,650
b
Computation of income tax:
Income from continuing operations before taxes		874,650
Nontaxable income (gain on life insurance)		(114,400)
Income from continuing operations before taxes		760,250
Tax rate		30%
Income tax expense		228,075