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

Question

Stellar Inc. reported income from continuing operations before taxes during 2017 of $813,800. Additional transactions occurring in 2017 but not considered in the $813,800 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 114,540 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 $93,200 during the year. 2. At the beginning of 2015, the corporation purchased a machine for $75,600 (salvage value of $12,600) 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 $62,000 (pretax). 4. When its president died, the corporation realized $156,800 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,040 (the gain is nontaxable). 5. The corporation disposed of its recreational division at a loss of $124,200 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 $62,570 and decrease 2016 income by $20,150 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40%.

Explanation / Answer

Stellar Inc. Income Statement (Partial) For the Year Ended December 31, 2017 Income from continuing operations before income tax (a) $864,660 Income tax (b) 226,170 Income from continuing operations 638,490 Discontinued operations Loss from disposal of recreational division $124,200 Less: Applicable income tax reduction 37,260 86,940 Income before extraordinary item 551,550 Extraordinary item: Major casualty loss 93,200 Less: Applicable income tax reduction 27,960 65,240 Net income $486,310 Per share of common stock: Income from continuing operations ($638,490 / 114,540 shares) (Rounded) $5.57 Discontinued operations, net of tax ($86,940 / 114,540 shares) (Rounded) (0.76) Income before extraordinary items 4.82 Extraordinary item, net of tax ($65,240 / 114,540 shares) (0.57) Net income ($486,310 ÷ 114,540 shares) $4.25 (a) Computation of income from continued operations before taxes: As previously stated $813,800 Loss on sale of securities (62,000) Gain on proceeds of life insurance policy ($156,800 – $46,040) 110,760 Error in computation of depreciation As computed ($75,600 ÷ 6) 12,600 Corrected (($75,600 – $12,600) ÷ 6) 10,500 2,100 As restated $864,660 (b) Computation of income tax: Income from continuing operations before taxes $864,660 Nontaxable income (gain on life insurance) (110,760) Taxable income 753,900 Tax rate 30% Income tax expense $226,170

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