Question

Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31):
2021 2020
Sales revenue $4,400,000 $3,500,000
Cost of goods sold 2,860,000 2,000,000
Administrative expense 800,000 675,000
Selling expense 360,000 302,000
Interest revenue 150,000 140,000
Interest expense 200,000 200,000
Loss on sale of assets of discontinued component 48,000

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 $112,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:

1/1/2021–9/30/2021 2020
Sales revenue $400,000 $500,000
Cost of goods sold (290,000) (320,000)
Administrative expense (50,000) (40,000)
Selling expense (20,000) (20,000)
Operating income before taxes $40,000 $120,000

In addition to the account balances above, several events occurred during 2021 that have not yet been reflected in the above accounts:

A fire caused $50,000 in uninsured damages to the main office building. The fire was considered to be an unusual event. Inventory that had cost $40,000 had become obsolete because a competitor introduced a better product. The inventory was written down to its scrap value of $5,000. 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 300,000 shares of outstanding common stock.

Answer 1

Answer:

NET INCOME

2021 $0.50

2020 $1.10

Explanation:

Preparation for a multiple-step income statement for the Reed Company for 2021 and 2020

2021 2020

Sales revenue

4,000,000 3,000,000

($4,400,000-400,000) ($3,500,000-500,000)

Cost of goods sold

2,570,000. 1,680,000

(2,860,000-290,000) (2,000,000-320,000)

Goss profit loss

1,430,000 1,320,000

Operating expenses

Administrative expense

750,000 635,000

(800,000 -50,000) (675,000-40,000)

Selling expense

340,000 282,000

(360,000-20,000) (302,000-20,000)

Loss on building 50,000 -

Loss on inventory write down 35,000 -

(40,000-5,000)

Total operating expenses

1,175,000 917,000

Operating income 255,000 403,000

Other income (Expense) :

Interest revenue 150,000 140,000

Interest expenses (200,000) (200,000)

Total other expenses (net) (50,000) (60,000)

Income from continuing operations before income taxes

205,000 343,000

Income tax expenses

51,250 85,750

(25*205,000) (25%*343,000)

Income from continuing operations

153,750 257,250

Discontinued operations :

Income(Loss) from operations of discontinued component

(8,000) 120,000

(40,000-48,000)

Income tax benefit (expense)

3,200 (48,000)

(40%*8,000) (40%*120,000)

Income (loss) on discontinued operations

(4,800) 72,000

Net income

148,950 329,250

Earnings per share :

Income from continuing operations

0.51 0.86

(153,750/300,000) (257,250/300,000)

Discontinued operations

(0.01) 0.24

[(4,800)/300,000] (72,000/300,000)

NET INCOME 0.50 1.10

Operating income =

Gross profit loss - Total operating expenses

Income from continuing operations before income taxes=Operating income+Total other expenses (net)

Income from continuing operations=Income from continuing operations before income taxes-Income tax expenses

Income (loss) on discontinued operations =Income(Loss) from operations of discontinued component +Income tax benefit (expense)

Net income =

(Income from continuing operations +Income (loss) on discontinued operations

NET INCOME=Income from continuing operations +Discontinued operations

Therefore the NET Income for 2021 is $0.50

While the NET INCOME for 2020 is $1.10