Question

Waterway Corp. has 150,600 shares of common stock outstanding. In 2020, the company reports income from continuing operations before income tax of $1,233,800. Additional transactions not considered in the $1,233,800 are as follows.

1.		In 2020, Waterway Corp. sold equipment for $37,700. The machine had originally cost $81,400 and had accumulated depreciation of $30,400. The gain or loss is considered non-recurring.
2.		The company discontinued operations of one of its subsidiaries during the current year at a loss of $191,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was $93,700 before taxes; the loss from disposal of the subsidiary was $100,100 before taxes.
3.		An internal audit discovered that amortization of intangible assets was understated by $39,300 (net of tax) in a prior period. The amount was charged against retained earnings.
4.		The company recorded a non-recurring gain of $126,000 on the condemnation of some of its property (included in the $1,233,800).

Analyze the above information and prepare an income statement for the year 2020, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 19% on all items, unless otherwise indicated.) (Round earnings per share to 2 decimal places, e.g. 1.47.)

Answer 1

Income statement for the year 2020 is shown as follows:- (Amounts in $)

WATERWAY CORP.
Income Statement (Partial)
December 31, 2020
Income from continuing operations before income tax (1,233,800-Loss on sale of equipment 13,300) (See Note 1)			1,220,500
Income Tax (1,220,500*19%)			231,895
Income from Continuing Operations (1,220,500-231,895)			988,605
Discontinued Operations
Loss from Operations of Discontinued Subsidiary	93,700
Less: Applicable Income Tax Reduction (93,700*19%)	17,803	75,897
Loss from Disposal of Subsidiary	100,100
Less: Applicable Income Tax Reduction (100,100*19%)	19,019	81,081
Loss from discontinued operations (net of tax) (75,897+81,081)			156,978
Income before extraordinary item (988,605-156,978)			831,627
Extraordinary Item:
Gain on Condemnation			126,000
Less: Applicable tax (126,000*19%)			23,940
Net Income (831,627+126,000-23,940)			933,687
Per Share of Common Stock:
Income from continuing operations (988,605/150,600)		6.56
Loss from discontinued operations (net of tax) (156,978/150,600 shares)		(1.04)
Income before extraordinary item (831,627/150,600)		5.52
Extraordinary Gain (net of tax) [(126,000-23,940)/150,600]		0.68
Net Income (933,687/150,600)		6.20

Notes:-

1) Net Book Value of Equipment sold = Cost - Accumulated Depreciation

= $81,400 - $30,400 = $51,000

Loss on sale of equipment = Net book value - Sale value

= $51,000 - $37,700 = $13,300

This loss on sale of equipment has not been adjusted from Income from continuing operations before income tax of $1,233,800. Therefore 13,300 is deducted from $1,233,800 to calculate correct Income from continuing operations before income tax.