Question

The following information pertains to Maynard Corporation’s income statement for the 12 months just ended. The company has an effective income tax rate of 40%.
Discontinued operations $(70,000)
Extraordinary loss due to earthquake (90,000)
Income from continuing operations (net of tax) 72,000
Cumulative effect of change in accounting principle 60,000
Maynard’s net income for the year is

A. $8,000
B. $(24,000)
C. $12,000
D. $36,000

Answer 1

Answer:

C. $12,000

Explanation:

Income from continuing operation: 72,000

discontinued operation    (70,000)

earthquake loss                (90,000)

total non-operating loss: (160,000)

tax shield of 40%                64,000

net non-operating             (96,000)

adjustment on accounting principle: 60,000

then, we apply tax rate of 40%:      (24,000)

net effect on shift of accounting principle: 36,000

Net income for Maynard:

72,000 - 96,000 + 36,000 = 12,000