Question

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 $4,550,000 2,890,000 830,000 390,000 153,000 206,000 60,000 2020 $3,650,000 2,030,000 705,000 332,000 143,000 206,000 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 $60,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows: Sales revenue Cont of goods sold Administrative expense Selling expense Operating income before taxes 1/1/2021-9/30/2021 $430,000 (305,000) (53,000) (23,000) $ 49,000 2020 $530,000 (338,000) (43,000) (23,000) $ 126,000 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 $53,000 in uninsured damages to the main office building. The fire was considered to be an unusual event. 2. Inventory that had cost $43,000 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: 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 400,000 shares of outstanding common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

Answer 1

Prepare the comparative income statement as follows:

R Inc
Comparative Income Statements
For the Years Ended December
Particulars	2021	2020
Sales revenue	$4,120,000	$3,120,000
Cost of goods sold	$2,585,000	$1,692,000
Gross profit	$1,535,000	$1,428,000
Operating expenses
Administrative expenses	$777,000	$662,000
Selling expenses	$367,000	$309,000
Loss from fire damage	$53,000
Obsolete inventory written off.	$37,000
Total operating expenses	$1,234,000	$971,000
Operating income	$301,000	$457,000
Other income (expense)
Interest revenue	$153,000	$143,000
Interest expense	($206,000)	($206,000)
Total other expense (net)	($53,000)	($63,000)
Income from continuing operations before income tax	$248,000	$394,000
Income tax expense @ 25%	$62,000	$98,500
Income from continuing operations	$186,000	$295,500
Discontinued operations:
Loss from operations of discontinued component	($11,000)	$126,000
Income tax benefit (expense)	$2,750	$31,500
Income (loss) on discontinued operations	($8,250)	$94,500
Net income	$177,750	$390,000
Earnings per share:
Income from continuing operations	$0.47	$0.74
Income from Discontinued operations	($0.02)	$0.24
Net income	$0.44	$0.98

Working Notes:

Particulars	2021	2020
Total sales revenue	$4,550,000	$3,650,000
Less: Sales related discontinued component	$430,000	$530,000
Sales revenue of continued operations	$4,120,000	$3,120,000
Total cost of goods sold	$2,890,000	$2,030,000
Less: Cost of goods related discontinued component	$305,000	$338,000
Cost of goods sold of continued operations	$2,585,000	$1,692,000
Total administrative expenses	$830,000	$705,000
Less: Administrative expenses related discontinued component	$53,000	$43,000
Administrative expenses of continued operations	$777,000	$662,000
Total selling expenses	$390,000	$332,000
Less: Selling expenses related discontinued component	$23,000	$23,000
Selling expenses of continued operations	$367,000	$309,000
Loss in 2021
Income from operations	$49,000
Loss on sale of assets	$60,000
Loss before income tax benefit	($11,000)
Tax benefit @ 25%	$2,750
After tax loss on discontinued operations	($8,250)
Compute earnings per share from continued and discontinued operations as follows:
Income from continuing operations	$186,000	$295,500
÷ Number of shares	400,000	400,000
Earnings per share:	$0.47	$0.74
Income from Discontinued operations	($8,250)	$94,500
÷ Number of shares	400,000	400,000
Earnings per share:	($0.02)	$0.24