Metlock Inc. reported income from continuing operations before taxes during 2017

Question

Metlock Inc. reported income from continuing operations before taxes during 2017 of $796,100. Additional transactions occurring in 2017 but not considered in the $796,100 are as follows.

Prepare an income statement for the year 2017 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 113,840 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.) (Round earnings per share to 2 decimal places, e.g. 1.48 and all other answers to 0 decimal places, e.g. 5,275.)

1. The corporation experienced an uninsured flood loss in the amount of $94,500 during the year. 2. At the beginning of 2015, the corporation purchased a machine for $70,200 (salvage value of $11,700) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, 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 $55,400 (pretax). 4. When its president died, the corporation realized $147,600 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,690 (the gain is nontaxable). 5. The corporation disposed of its recreational division at a loss of $112,050 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 2015 income by $62,580 and decrease 2016 income by $20,490 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40%.

Explanation / Answer

MAHER INC. Income Statement (Partial) For the Year Ended December 31, 2017 Income from continuing operations before income tax (a) 843,560 Income tax (b) 222795 Income from continuing operations 620,765 Discontinued operations Loss from disposal of recreational division 112,050 Less: Applicable income tax reduction 33615 78,435 Income before extraordinary item 542,330 Extraordinary item: Major casualty loss 94500 Less: Applicable income tax reduction 28350 66150 Net Income 476,180 Per share of common stock: Income from continuing operations ($620,765 / 113,840 shares) (Rounded) 5.45 Discontinued operations, net of tax ($78435/ 113,840 shares) (Rounded) 0.69 Income before extraordinary items 4.76 Extraordinary item, net of tax ($66,150 / 113,840 shares) 0.58 Net Income (476180/113840) 4.18 a Computation of income from continued operations before taxes: As previously stated 796,100 Loss on sale of securities 55400 Gain on proceeds of life insurance policy ($147,600 – $46,690) 100910 Error in computation of depreciation As computed ($70,200 ÷ 6) 11700 Corrected (($70,200 – $11,700) ÷ 6) 9750 1950 As restated 843,560 b Computation of income tax: Income from continuing operations before taxes 843,560 Nontaxable income (gain on life insurance) 100910 Taxable income 742,650 Tax rate 30% Income Tax Expense 222795

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