Question

Problem 4-03 Vaughn Inc. reported income from continuing operations before taxes during 2020 of $807,900. Additional transactions occurring in 2020 but not considered in the $807,900 are as follows. 1. The corporation experienced an uninsured flood loss in the amount of $92,700 during the year. 2. At the beginning of 2018, the corporation purchased a machine for $57,600 (salvage value of $9,600) that had a useful life of 6 years. The bookkeeper used straight- line depreciation for 2018, 2019, and 2020, 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 $64,300 (pretax). 4. When its president died, the corporation realized $136,500 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $43,150 (the gain is nontaxable). 5. The corporation disposed of its recreational division at a loss of $109,090 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 2018 income by $63,100 and decrease 2019 income by $20,980 before taxes. The FIFO method has been used for 2020. The tax rate on these items is 30% Prepare an income statement for the year 2020 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 126,910 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 O decimal places, e.g. 5,275.) VAUGHN INC. Income Statement (Partial)

Answer 1

Answer:

Income from continuing operation before taxes during 2020 = $807900
Loss on sale of security = $64300
Gain on proceds from life insurance policy = 136500-43150 = $93350
Uninsurd flood loss = $92700
Excess depreciation charged due to error in computation
=(57600/6)-((57600-9600)/6)
=9600-8000
=$1600

Income from coninuing operations before income tax = 807900-64300+93350-92700+1600
=$745850

Applicable income tax reduction = $109090 x 30%
=$32727

Non taxable income (Gain on proceeds from life insurance policy) = $93350
Taxable income = 745850 - 93350 = $652500
Income tax expense = 652500 x 30% = $195750
Income from continuing operations EPS = 550100/126910 = $4.33
Discountinued operations EPS = 76363/126910 = $0.60
Net income EPS = 473737/126910 = $3.73

VAUGHN INC. Income Statement (Partial) For the Year Ended December 31, 2020
	Amount	Amount
Income from continuing operations before tax		$745850
Income tax expense		$195750
Income from continuing operations		$550100
Discontinued Operations
Loss from disposal of recreational division	$109090
Income tax reduction	$32727	($76363)
Net Income/(loss)		$473737

Earnings per Share
Income fromcontinuing operations	$4.33
Discontinuing operations net of tax	$0.60
Net Income	$3.73