Income Statement Other Items
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. One of the requirements to report a sale of a component as discontinued operations is that
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
2. Income from a discontinued operation is reported after tax because
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
3. Which of the following is not true relative to the reporting of earnings per share?
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
4. A loss that is unusual in nature should be reported as
a. part of income from continuing operations
b. an operating expense
c. an extraordinary item
d. an unusual item
5. Comprehensive income must only be reported
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
6. Current comprehensive income items do not include
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
7. Which of the following items would be reported as other revenue or expense?
a. advertising expense
b. rent expense
c. interest expense
d. income tax expense
8. The difference in basic earnings per share and diluted earnings per share is related to the
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
9. Earnings per share reports
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
10 Which of the following require a footnote disclosure when it is material?
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
11. A company had the following information. Income from continuing operations already includes all items that should be included.
|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.
1st – Determine the items that are already included in income from continuing operations before tax:
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|
|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|
12. A retail company operates 100 stores in 4 major geographical areas. During the current year, the company spent $1 million to complete a significant remodel of stores in one of the geographical areas. On March 1st of the current year the company decided to close all the stores in another major geographical area. This area generated $500,000 in total losses during the current year. $200,000 of the total operating losses occurred in the prior year. The geographic area to be closed is expected to generate income in the next year of approximately $350,000 and is expected to be sold next year for a gain of $600,000. Assets held for sale have a fair market value greater than book value by $200,000. The income tax rate is 40%. All amounts are stated before tax.
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.
|Income before tax :||$1,666,667|
|Income from continuing operations:||$1,000,000|
|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.
13. An accountant was presented with the following before tax amounts related to a manufacturing company:
|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.
|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 Before Tax||858,000|
|Income from continuing operations:||514,800|
|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|
|Gain on foreign currency exchange, net tax of $8,000||12,000|
|Unrealized holding loss, net of tax savings of $2,000||(3,000)|
Earnings per share: