Reference no: EM1314586

Preparation of an income statement and computation of earnings per share.

Tony Rich Inc. reported income from continuing operations before taxes during 2007 of $790,000. Additional transactions occurring in 2007 but not considered in the $790,000 are as follows.

1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $80,000 during the year. The tax rate on this item is 46%.
2. At the beginning of 2005, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had failed to deduct the salvage value in computing the depreciation base.
3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax).
4. When its president died, the corporation realized $110,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable).
5. The corporation disposed of its recreational division at a loss of $115,000 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 2005 income by $60,000 and decrease 2006 income by $20,000 before taxes. The FIFO method has been used for 2007. The tax rate on these items is 40%.

Instructions:

Prepare an income statement for the year 2007 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 80,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)