Income Statement Other Items
Medium Test
Medium Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. the current management team must be reorganized
b. management will not have any future involvement in the component
c. the management team will continue managing the component
d. employees must be offered a significant severance
Answer
a. the income is not taxable
b. the income tax is not paid until after the sale occurs
c. income tax expense is reported above discontinued operations and the income is taxable.
d. the income is taxable only in the period the sale occurs
Answer
a. weighted average outstanding common shares is used
b. it is not reported for discontinued operations
c. it is reported separately for each item after income from continuing operations
d. all of the above is true
Answer
a. part of income from continuing operations
b. an operating expense
c. an extraordinary item
d. an unusual item
Answer
a. on the bottom of the income statement
b. on a separate statement of other comprehensive income
c. in the footnotes
d. none of the above
Answer
a. unrealized gains/losses from holding investments short term
b. gains/losses from employee benefit plans
c. gains/losses on derivatives
d. foreign currency gains/losses
Answer
a. advertising expense
b. rent expense
c. interest expense
d. income tax expense
Answer
a. preferred dividends declared
b. the period the earnings occur
c. the number of shares the company is authorized to issue
d. the number of shares the company is currently contingently obligated to issue
Answer
a. earnings for all shares outstanding
b. earnings in total for the company
c. earnings per common share outstanding
d. the proforma future earnings potential of the company
Answer
a. a change in accounting methods
b. a correction of an error that occurred in prior periods
c. a discontinued operation
d. all of the above
Answer
Income from continuing operations before tax | 1,100,000 |
Loss from a fire in a warehouse | 205,000 |
Gain from a sale of equipment | 84,000 |
Current period income from operations held for sale | 108,000 |
Projected income from operations held for sale | 92,000 |
Impairment loss on assets of a component held for sale | 250,000 |
Costs to lay off employees and close one out of six stores | 40,000 |
Income tax rate is 40% |
Prepare the income statement for the company beginning with income from continuing operations before tax. Operations held for sale does qualify as a component.
Answer
Loss from a fire: reported as other revenue/expense
Lay off costs: restructuring expense reported as operating expenses
Gain from sale of equipment
Do not do anything with these items since they are already included in income from continuing operations before tax of $1,100,000.
2nd : Compute the tax and after tax amounts for each separately reportable item
Before tax | Tax | After Tax | |
Current period income from… | 108,000 | 43,200 | 64,800 |
Impairment loss from assets | 250,000 | 100,000 | 150,000 |
Projected income, gain or loss is not reported in the current period
3rd Write the format and drop in the numbers:
Income before tax : | $1,100,000 |
Tax expense | $ (440,000) |
Income from continuing operations: | $ 660,000 |
Discontinued Operations: | |
Income from discontinued operations, net of tax $43,200 | $ 64,800 |
Impairment loss on assets held for sale, net of tax $100,000 | $ (150,000) |
Total Discontinued Operations | $ (85,200) |
Net Income | $ 574,800 |
The company’s total after tax income from continuing operations is $1,600,000 before considering the above items.
Prepare the income statement for the company beginning with income from continuing operations.
Answer
Income before tax : | $1,666,667 |
Tax expense | ($666,667) |
Income from continuing operations: | $1,000,000 |
Discontinued Operations: | |
Loss from discontinued operations, net of tax $200,000 | $ (300,000) |
Net Income | $ 700,000 |
Income from continuing operations after tax of $1,600,000 must be divided by one less the tax rate of 40% or 60% = $2,666,667 is the before tax amount.
This amount is reduced by the restructuring expense of $1,000,000 that is reported as an operating expense and reduces income from operations before tax.
The adjusted income before tax is $1,666,667.
Include all income or loss from operations held for sale during the current year.
No impairment loss occurs when assets have a fair market value greater than book value. Expected income and gains are reported in the period that it happens.
Gain on foreign currency exchange | 20,000 |
Loss from operations on a component held for sale | 62,000 |
Gain on the sale of equipment | 8,000 |
Gain on the sale of a component held for sale | 90,000 |
Unrealized holding loss on long term investments (OCI) | 5,000 |
Income tax rate | 40% |
The company reports Comprehensive Income on the income statement.
The Company has 100,000 common shares outstanding and 50,000 preferred shares outstanding.
No preferred dividends were declared or paid.
Prepare the income statement beginning with Income before tax of $850,000 before considering the above items.
Answer
Income before tax before considering listed items | $850,000 |
Items reported before income before tax: | |
Gain on the sale of equipment | 8,000 |
Adjusted Income Before Tax: | 858,000 |
Income Statement:
Income Before Tax | 858,000 |
Tax Expense | (343,200) |
Income from continuing operations: | 514,800 |
Discontinued Operations: | |
Loss from discontinued operations, net of tax $24,800 | (37,200) |
Gain on sale of discontinued operations, net of tax of $36,000 | 54,000 |
Total discontinued operations | 16,800 |
Net Income | $531,600 |
Gain on foreign currency exchange, net tax of $8,000 | 12,000 |
Unrealized holding loss, net of tax savings of $2,000 | (3,000) |
Comprehensive Income | $540,600 |
Earnings per share:
Continuing operations | $5.15 |
Discontinued Operations | $0.17 |
Net Income | $5.32 |