Question

Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31). 2021 2020 Sales revenue $ 4,400,000 $3,500,000 2,860,000 Cost of goods sold Administrative expense 2,000,000 675,000 800,000 Selling expense 360,000 302,000 Interest revenue 150,000 140,000 Interest expense 200,000 200,000 Loss on sale of assets of discontinued component 48,000 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. Page 219 The assets of the component were sold on September 30, 2021, for $48,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows: 1/1/2021-9/30/2021 2020 Sales revenue $400,000 $ 500,000 Cost of goods sold (290,000) (320,000) Administrative expense (50,000) (40,000) Selling expense (20,000) (20,000) Operating income before taxes $ 40,000 $ 120,000 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 $50,000 in uninsured damages to the main office building. The fire was considered to be an unusual event. 2. Inventory that had cost $40,000 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 300,000 shares of outstanding common stock.

Please provide written out solution

Answer 1

Answer :

REED COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021	2020
Sales revenue ........................................................ [1]	$4,000,000	[6] $3,000,000
Cost of goods sold ................................................ [2]	2,570,000	[7] 1,680,000
Gross profit ...........................................................	1,430,000	1,320,000
Operating expenses:
Administrative expense ...................................... [3]	750,000	[8] 635,000
Selling expense ................................................... [4]	340,000	[9] 282,000
Loss on building (fire damage) ............................	50,000	- -
Loss on inventory write-down ............................	35,000	- -
Total operating expenses .................................	1,175,000	917,000
Operating income ..................................................	255,000	403,000
Other income (expense):
Interest revenue ...................................................	150,000	140,000
Interest expense ...................................................	(200,000)	(200,000)
Total other income, net ...................................	(50,000)	(60,000)
Income from continuing operations before income taxes....................................................	205,000	343,000
Income tax expense ..............................................	51,250	85,750
Income from continuing operations.......................	153,750	257,250
Discontinued operations:
Income (loss) from operations of discontinued component (including loss on disposal of $48,000 in 2021) ...............................................	(8,000)	120,000
Income tax benefit (expense)................................	2,000	(30,000)
Income (loss) on discontinued operations ............ [5]	(6,000)	90,000
Net income ............................................................	$ 147,250	$ 347,250
Earnings per share: Income from continuing operations .......................	$ 0.51	$ 0.86
Discontinued operations ........................................	(0.02)	0.30
Net income ............................................................	$ 0.49	$ 1.16

[1]   $4,400,000 – 400,000 (sales from discontinued operation)   

[2]     $2,860,000 – 290,000 (cost of goods sold from discontinued operations)

[3]     $800,000 – 50,000 (administrative expenses from discontinued operations)

[4]     $360,000 – 20,000 (selling expenses from discontinued operations)

[5] Loss in 2021:

   Income from operations $ 40,000

   Loss on sale of assets    (48,000)

   Loss before tax benefit (8,000)

   Tax benefit (25% × $8,000) 2,000

   Loss on discontinued operations, net of tax benefit $ (6,000)

[6]     $3,500,000 – 500,000 (sales from discontinued operation)

[7] $2,000,000 – 320,000 (cost of goods sold from discontinued operations)

[8] $675,000 – 40,000 (administrative expenses from discontinued operations)

[9] $302,000 – 20,000 (selling expenses from discontinued operations)