Question

Maher Inc. reported income from continuing operations before taxes during 2020 of $790,000. Additional transactions occurring in 2020 but not considered in the $790,000 are as follows. 1. The corporation experienced an uninsured flood loss in the amount of $90,000 during the year. 2. At the beginning of 2018, the corporation purchased a machine for $54,000 (salvage value of $9,000) 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 $57,000 (pretax). 4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable). 5. The corporation disposed of its recreational division at a loss of $115,000 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 $60,000 and decrease 2019 income by $20,000 before taxes. The FIFO method has been used for 2020. The tax rate on these items is 30%.
Required:
Prepare an income statement for the year 2020 starting with income from continuing operations before taxes.

Answer 1

The preparation of the income statement for the year ended December 31, 2020, for Maher Inc., is as follows:

Maher Inc.

Income Statement

For the year ended December 31, 2020:

Income from continuing operations before taxes     $790,000

2. Overstated depreciation expense              4,500

6. Net change in profit (inventory method)  40,000     44,500

Adjusted income from continuing operations          $834,500

5. Loss from discontinued operations                         (115,000)

Adjusted income after discontinued operations      $719,500

Other events:

1. Uninsured flood loss                               ($90,000)

3. Loss from sale of securities                     (57,000) (147,000)

Adjusted taxable income                                          $572,500

Taxes (30%)                                                                   (171,750)

4. Non-taxable Gain from cash surrender value        104,000

Adjusted net income after taxes                            $504,750

What is the adjusted net income?

The adjusted net income takes into account all the tax-deductibles and income from all sources.

Data and Calculations:

2020 Income from continuing operations before taxes = $790,000

Transactions:

1. Uninsured flood loss = $90,000

2. Value of machine = $54,000

Salvage value = $9,000

Depreciable amount = $45,000 ($54,000 - $9,000)

Estimated useful life =6 years

Annual straight-line depreciation expense = $7,500 ($45,000/6)

Overstated depreciation expense = $4,500 ($1,500 x 3)

3. Loss from sale of securities = $57,000

4. Non-taxable Gain from cash surrender value = $104,000 ($150,000 - $46,000)

5. Loss from discontinued operations = $115,000

6. Net change in inventory method = $40,000 increase ($60,000 - $20,000)

Tax rate = 30%

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