Problem 4-7 Wade Corp. has 150,600 shares of common stock outstanding. In 2014,

Question

Problem 4-7

Wade Corp. has 150,600 shares of common stock outstanding. In 2014, the company reports income from continuing operations before income tax of $1,229,200. Additional transactions not considered in the $1,229,200 are as follows.

Analyze the above information and prepare an income statement for the year 2014, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.) (Round earnings per share to 2 decimal places, e.g. 1.48.)

1. In 2014, Wade Corp. sold equipment for $36,400. The machine had originally cost $84,100 and had accumulated depreciation of $31,300. The gain or loss is considered ordinary. 2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $190,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was $90,300 before taxes; the loss from disposal of the subsidiary was $99,700 before taxes. 3. An internal audit discovered that amortization of intangible assets was understated by $39,700 (net of tax) in a prior period. The amount was charged against retained earnings. 4. The company had a gain of $127,100 on the condemnation of much of its property. The gain is taxed at a total effective rate of 40%. Assume that the transaction meets the requirements of an extraordinary item.

Explanation / Answer

The income statement is given below:

__________________

Notes:

1) Calculation of Income before Tax

Income from Continuing Operations before Income Tax = $1,229,200

Less Loss on Sale of Equipment (36,400 - (84,100 - 31,300)) = $16,400

Add Gain on Condemnation of Property = $127,100

Restated Income Before Tax = $1,339,900

2) Income Tax Expense = $1,339,900*38% = $509,162

3) Amortization of intangible assets was correctly charged to retained earnings.

Wade Corporation Income Statement for 2014 Income before Income Tax 1,339,900 Less Income Tax Expense 509,162 Income from Continuing Operations 830,738 Less Discontinued Operations Loss from Operations of Discontinued Subsidiary 90,300 Less Income Tax Reduction (90,300*38%) 34,314 55,986 Loss from Disposal of Subsidiary 99,700 Less Income Tax Reduction (99,700*38%) 37,886 61,814 -117,800 (55,986 + 61,814) Income before Extraordinary Item 712,938 Add Extraordinary Item Gain on Condemnation 127,100 Less Income Tax Reduction (127,100*40%) 50,840 76,260 Net Income 789,198 (712,938 + 76,260) Earnings Per Share Income from Continuing Operations (830,738/150,600) 5.52 Less Discontinued Operations, Net of Tax (-117,800/150,600) -0.78 EPS before Extraordinary Item 4.73 Add Extraordinary Item, Net of Tax (76,260/150,600) 0.51 EPS (Net Income) [789,198/150,600] $5.24

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