Sarasota Inc. reported income from continuing operations before taxes during 201
ID: 2543559 • Letter: S
Question
Sarasota Inc. reported income from continuing operations before taxes during 2017 of $797,900. Additional transactions occurring in 2017 but not considered in the $797,900 are as follows 1. The corporation experienced an uninsured flood loss in the amount of $93,400 during the year. 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 2. 3. Sale of securities held as a part of its portfolio resulted in a loss of $60,800 (pretax) 4. When its president died, the corporation realized $162,100 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $47,440 (the gain is nontaxable) 5. The corporation disposed of its recreational division at a loss of $105,080 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 $55,160 and decrease 2016 income by $19,110 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40% 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 119,240 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.)Explanation / Answer
Answer:
SARASOTA INC.
Income Statement (Partial)
For the Year Ended December 31, 2017
Income from continuing operations before income tax (a)
$853,860
Income tax (b)
221,760
Income from continuing operations
632,100
Discontinued operations
Loss from disposal of recreational division
$105,080
Less: Applicable income tax reduction
31,524
73,556
Income before extraordinary item
558,544
Extraordinary item:
Major casualty loss
93,400
Less: Applicable income tax reduction
28,020
65,380
Net income
$493,164
Per share of common stock:
Income from continuing operations ($632,100 / 119,240 shares) (Rounded)
$5.30
Discontinued operations, net of tax ($73,556 / 119,240 shares) (Rounded)
(0.62)
Income before extraordinary items
4.68
Extraordinary item, net of tax ($65,380 / 119,240 shares)
(0.55)
Net income ($493,164 ÷ 119,240 shares)
$4.14
(a) Computation of income from continued operations before taxes:
As previously stated
$797,900
Loss on sale of securities
(60,800)
Gain on proceeds of life insurance policy ($162,100 – $47,440)
114,660
Error in computation of depreciation
As computed ($75,600 ÷ 6)
12,600
Corrected (($75,600 – $12,600) ÷ 6)
10,500
2,100
As restated
$853,860
(b) Computation of income tax:
Income from continuing operations before taxes
$853,860
Nontaxable income (gain on life insurance)
(114,660)
Taxable income
739,200
Tax rate
30%
Income tax expense
$221,760
SARASOTA INC.
Income Statement (Partial)
For the Year Ended December 31, 2017
Income from continuing operations before income tax (a)
$853,860
Income tax (b)
221,760
Income from continuing operations
632,100
Discontinued operations
Loss from disposal of recreational division
$105,080
Less: Applicable income tax reduction
31,524
73,556
Income before extraordinary item
558,544
Extraordinary item:
Major casualty loss
93,400
Less: Applicable income tax reduction
28,020
65,380
Net income
$493,164
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