Question

Need help figuring out the right answers for the comparative income statement.

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 2020 $5,350,000 $4,450,000 3,050,000 2,190,000 990,000 865,000 550,000 492,000 169,000 159,000 238,000 238,000 124,000 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 $124,000 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 $ 590,000 (385,000) (69,000) (39,000 $ 97,000 2020 $ 690,000 (434,000) (59,000) (39,000 $ 158,000 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 $69,000 in uninsured damages to the main office building. The fire was considered to be an unusual event. 2. Inventory that had cost $59,000 had become obsolete because a competitor introduced a better product. The inventory was written down to its scrap value of $6,000. 3. Income taxes have not yet been recorded. Required:

Answer 1

Answer:

REED COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021	2020
Sales Revenue	4,760,000	3,760,000
Cost of goods sold	2,665,000	1,756,000
Gross Profit	2,095,000	2,004,000
Operating expense
Administrative	921,000	806,000
Selling	511,000	453,000
Loss from free damage	69,000	-
Loss from write down of obsolete inventory	53,000
Total Operating expense	1,554,000	1,259,000
Operating Income	541,000	745,000
Other Income (expense)
Interest Revenue	169,000	159,000
Interest Expense	(238,000)	(238,000)
Total Other expense	(69,000)	(79,000)
Income from continuing operations before income taxes and extraordinary item	472,000	666,000
Income tax expense	118,000	166,500
Income from continuing operations before extraordinay item	354,000	499,500
Discontinued operations gain (loss)
Income (loss) from operations of discontinued component	(27,000)	(158,000)
Income tax benefit (expense)	6,750	39,500
Income (loss) from discontinued operations	(20,250)	(118,500)
Net Income (loss)	333,750	381,000
Earnings per share:
Income from continuing operations before extraordinay item	0.51	0.71
Discontinued operations	(0.03)	(0.17)
Net Income	0.48	0.54

Calculation:

First we need to calculate the Sales revenue, Cost of goods sold, Administrative and selling expenses by deducting the component results from the income statement results provided. Rest of the amounts are provided in the question.

So the calculation is as below:

2021:

Sales revenue: $5350000 – $590000 = $4,760,000

Cost of goods sold: $3050000 – $385000 = $2,665,000

Administrative: $990000 – $69000 = $921,000

Selling: $550000– $39000 = $511,000

2020:

Sales revenue: $4450000 – $690000= $3,760,000

Cost of goods sold: $2190000– $434000= $1,756,000

Administrative: $865000 – $59000= $806,000

Selling: $492000 – $39000 = $453,000

Then we need to find the  Loss on discontinued operations, net of tax benefit as below:

Loss in 2021:
Income from operations	97,000
Loss on sale of assets	124,000
Loss before tax benefit	-27,000
Tax benefit (25% × $27,000	-6,750
Loss on discontinued operations, net of tax benefit	-20,250

For calculating the Earnings per share, we need to divide the results with the 700000 shares outstanding.