Reporting Unusual Events: A Comprehensive Problem
The income statement below was prepared by a new and inexperienced employee in the accounting department of Phoenix, Inc., a business organized as a corporation.
PHOENIX, INC. | ||
INCOME STATEMENT | ||
FOR THE YEAR ENDED DECEMBER 31, 2015 | ||
Net sales |
| $10,800,000 |
Gain on sale of treasury stock |
| 62,000 |
Excess of issuance price over par value of capital stock |
| 510,000 |
Prior period adjustment (net of income tax) |
| 60,000 |
Extraordinary gain (net of income tax) |
| 36,000 |
Total revenue |
| $11,468,000 |
Less: |
|
|
Cost of goods sold | $6,000,000 |
|
Selling expenses | 1,104,000 |
|
General and administrative expenses | 1,896,000 |
|
Loss from settlement of litigation | 24,000 |
|
Income tax on continuing operations | 720,000 |
|
Operating loss on discontinued operations (net of income tax benefit) | 252,000 |
|
Loss on disposal of discontinued operations (net of income tax benefit) | 420,000 |
|
Dividends declared on common stock | 350,000 |
|
Total costs and expenses |
| 10,766,000 |
Net income |
| $ 702,000 |
Instructions
a. Prepare a corrected income statement for the year ended December 31, 2015, using the format illustrated in Exhibit 12–2 . Include at the bottom of your income statement all appropriate earnings-per-share figures. Assume that throughout the year the company had outstanding a weighted average of 180,000 shares of a single class of capital stock.
b. Prepare a statement of retained earnings for 2015. (As originally reported, retained earnings at December 31, 2014, amounted to $2,175,000.)
c. What does the $62,000 “gain on sale of treasury stock” represent? How would you report this item in Phoenix’s financial statements at December 31, 2015?
EXHIBIT 12–2 Earnings Per Share Presentation
PERRY CORPORATION | |
CONDENSED INCOME STATEMENT | |
FOR THE YEAR ENDED DECEMBER 31, 2015 | |
Net sales | $ 9,115,000 |
Costs and expenses (including tax on continuing operations) | 8,310,000 |
Income from continuing operations | $ 805,000 |
Loss from discontinued operations (net of income tax benefits) | (90,000) |
Income before extraordinary items | $ 715,000 |
Extraordinary loss (net of income tax benefit) | $ (120,000) |
Net income | $ 595,000 |
Earnings per share of common stock: |
|
Earnings from continuing operations | $3.67a |
Loss from discontinued operations | (0.45) |
Earnings before extraordinary items | $3.22b |
Extraordinary loss | (0.60) |
Net earnings | $2.62c |
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