Assignment:
Prepare an income statement for Tony Rich, Inc.
Tony Rich Inc. reported income from continuing operations before taxes during 2007 of $790,000. Additional transactions occurring in 2007 but not considered in the $790,000 are as follows:
1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $80,000 during the year. The tax rate on this item is 46%.
2. At the beginning of 2005, 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 2005, 2006, and 2007 but failed to deduct the salvage value in computing the depreciation base.
3. Sale of securities held as part of its portfolio resulted in a loss of $57,000 (pretax).
4. When its president died, the corporation realized $110,000 from an insurance policy. The cash surrender value of the 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 2005 income by $60,000 and decrease 2006 income by $20,000 before taxes. The FIFO method has been used for 2007. The tax rate on these items is 40%.
Instructions:
Prepare an income statement for the year 2007 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 80,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)
TONY RICH, INC
Income Statement (Partial)
For the Year Ended December 31, 2007
Income from continuing operations before taxes $790,000
Income tax 36,800
Income from continuing operations 753,200
Discontinued operations:
Title Amount
Title Formula Formula
Income before extraordinary item Formula
Extraordinary item:
Title Amount
Title Formula Formula
Title Formula
Per share of common stock:
Income from continuing operations Formula
Title Formula
Title
Formula
Title Formula
Net income per share Formula
Computation of income from continuous operations before taxes:
As previously stated Amount
Title Amount
"Gain on proceeds of life insurance policy
"
Amount
Error in computation of depreciation
As computed Formula
Corrected Formula Formula
As restated Formula
Computation of income tax:
Income from continuing operations before taxes Amount
Nontaxable income (gain on life insurance) Formula
Title Formula
Title Amount
Income tax expense Formula