Question:
Reagan Corporation computed income from continuing operations before income taxes of $4,200,000 for
2013.
The following material items have not yet been considered in the computation of income:
1. The company sold equipment and recognized a gain of $50,000. The equipment had been used in the
manufacturing process and was replaced by new equipment.
2. In December, the company received a settlement of $1,000,000 for a lawsuit it had filed based on
antitrust violations of a competitor. The settlement was considered to be an unusual and infrequent event.
3. Inventory costing $400,000 was written off as obsolete. Material losses of this type were incurred twice
in the last eight years.
4. It was discovered that depreciation expense on the office building of $50,000 per year was not recorded
in either 2012 or 2013.
In addition, you learn that included in revenues is $400,000 from installment sales made during the year.
The cost of these sales is $240,000. At year-end, $100,000 in cash had been collected on the related
installment receivables.
Because of considerable uncertainty regarding the collectibility of receivables from these sales, the
company’s accountant should have used the installment sales method to recognize revenue and gross
profit on these sales.
Also, the company’s income tax rate is 40% and there were 1 million shares of common stock
outstanding throughout the year.
Required:
Prepare an income statement for 2013 beginning with income from continuing operations before income
taxes. Include appropriate EPS disclosures.
Answer:
Reagan Corporation computed income from continuing operations before income taxes of $4,200,000 for
2013.
The following material items have not yet been considered in the computation of income:
1. The company sold equipment and recognized a gain of $50,000. The equipment had been used in the
manufacturing process and was replaced by new equipment.
2. In December, the company received a settlement of $1,000,000 for a lawsuit it had filed based on
antitrust violations of a competitor. The settlement was considered to be an unusual and infrequent event.
3. Inventory costing $400,000 was written off as obsolete. Material losses of this type were incurred twice
in the last eight years.
4. It was discovered that depreciation expense on the office building of $50,000 per year was not recorded
in either 2012 or 2013.
In addition, you learn that included in revenues is $400,000 from installment sales made during the year.
The cost of these sales is $240,000. At year-end, $100,000 in cash had been collected on the related
installment receivables.
Because of considerable uncertainty regarding the collectibility of receivables from these sales, the
company’s accountant should have used the installment sales method to recognize revenue and gross
profit on these sales.
Also, the company’s income tax rate is 40% and there were 1 million shares of common stock
outstanding throughout the year.
Required:
Prepare an income statement for 2013 beginning with income from continuing operations before income
taxes. Include appropriate EPS disclosures.
Answer:
