McMinville Corporation manufactures paper products. In 2007, the company purchas
ID: 2477943 • Letter: M
Question
McMinville Corporation manufactures paper products. In 2007, the company purchased several large tracts of timber for $22 million with the intention of harvesting the timber rather than buying this critical raw material from outside suppliers. However, in 2011, McMinville abandoned the idea and all of the timber tracts were sold for $31 million. Net income for 2011, before considering this event, is $17.5 million and the company's effective tax rate is 30%. The focus of this case is the income statement presentation of the gain on the sale of the timber tracts. Deliberate the situation independently and share the solution with the class. The goal of the class is to incorporate the views of each classmate into a consensus approach to the situation.
Explanation / Answer
Income statement presentation:
M Corp.
Income statement
Year ending, 2011
Particulars
Amount
Net Income before considering the event (after tax)
$ 17.50
Earnings before tax ($17.5/1.00-0.30)
$ 25.00
Gain on sale of timber tracts ($31-$22)
$ 9.00
Total net income after considering the event ($25+$9)
$ 34.00
Less: Income tax expense (0.30*$34)
$ 10.20
Net income after considering the special event
$ 23.80
By the above approach one can find the net income before and after considering the event.
M Corp.
Income statement
Year ending, 2011
Particulars
Amount
Net Income before considering the event (after tax)
$ 17.50
Earnings before tax ($17.5/1.00-0.30)
$ 25.00
Gain on sale of timber tracts ($31-$22)
$ 9.00
Total net income after considering the event ($25+$9)
$ 34.00
Less: Income tax expense (0.30*$34)
$ 10.20
Net income after considering the special event
$ 23.80