Chapter 4, Problem 4.6P

Income statement presentation; Discontinued operations; EPS

• LO4–1, LO4–3, LO4–4, LO4–5

Rembrandt Paint Company had the following income statement items for the year ended December 31, 2018 ($ in thousands):

Net sales	$18,000
Interest income	200
Interest expense	350
Cost of goods sold	10,500
Selling and administrative expenses	2,500
Restructuring costs	800

In addition, during the year the company completed the disposal of its plastics business and incurred a loss from operations of $1.6 million and a gain on disposal of the component’s assets of $2 million. 500,000 shares of common stock were outstanding throughout 2018. Income tax expense has not yet been recorded. The income tax rate is 30% on all items of income (loss).

Required:

Prepare a multiple-step income statement for 2018, including EPS disclosures.

To determine

Income Statement

The financial statement which reports revenues and expenses from business operations and the result of those operations is reported as net income or net loss for a particular time period is referred to as income statement.

Earnings per Share (EPS)

The share or portion of profit earned by each share is called as earnings per share.

$\boxed{\text{Earnings Per Share =}\frac{\text{Net Income}}{\text{Number of Common Shares Outstanding}}}$

To Prepare: A multiple-step income statement for Company R for 2018, along with EPS disclosure.

Explanation of Solution

Multi -step income statement

A multiple step income statement refers to the income statement that shows the operating, and non-operating activities of the business, under separate head.

Prepare multi-step income statement for Company R for 2018, along with EPS disclosure.

COMPANY  R
Income Statement
For the Year Ended December 31, 2018
Particulars	Amount ($ in thousands)	Amount ($ in thousands)
Sales revenue		18,000
Cost of goods sold		10,500
Gross profit		7,500
Less: Operating expenses:
Selling and administrative	2,500
Restructuring costs	800
		3,300
Operating income		4,200
Other income and expense :
Interest revenue	200
Interest Expenses	(350)
Interest income (expense), net		(150)
Income from continuing operations before     income tax		4,050
Income tax expense		1,215
Income from continuing operations		2,835
Discontinued operations:
Income from operations of discontinued component (a)	400
Income tax expense   (b)	120
Income on discontinued operations		280
Net income		3,115
Earnings per share:
Income from continuing operations  (c)		5.67
Income on discontinued operations  (d)		0.56
Net income		6.23

(Table 1)

Working Notes:

(1)

Calculate Income from operations of discontinued component for Company R

$\begin{array}{l}\left(\begin{array}{l}\text{Income from operations of }\\ \text{discontinued component}\end{array}\right)=\left(\begin{array}{l}\text{Loss from operation}-\text{Gain}\\ \text{on Disposal}\end{array}\right)\\ \text{ = \$1,600,000}-\$2,000,000\\ \text{ = \$400,000}\\ \end{array}$ (a)

(2)

Calculate Income tax expenses for Company R

$\begin{array}{l}\text{Income Tax Expenses = }\left(\begin{array}{l}\text{Income from operations of discontinued }\\ \text{component }\times \text{ Tax Rate}\end{array}\right)\\ \text{ = \$400 }\times 30\%\\ \text{ = \$120}\\ \end{array}$ (b)

(3)

Calculate the EPS for Income from continuing operations

$\begin{array}{l}\text{Earnings Per Share = }\frac{\text{Income from continuing operation}}{\text{Number of shares outstanding}}\\ \text{ = }\frac{\text{\$2,835,000}}{\$500,000}\\ \text{ = \$5}\text{.67}\end{array}$ (c)

(4)

Calculate the EPS for Income on discontinued operations

$\begin{array}{l}\text{Earnings Per Share = }\frac{\text{Income on discontinuing operations}}{\text{Number of shares outstanding}}\\ \text{ = }\frac{\text{\$280,000}}{\$500,000}\\ \text{ = \$0}\text{.56}\end{array}$ (d)

Conclusion

Hence, the value of Net income is $3,115 and EPS is $6.23 under the multi-step statement for Company R for the year ended December 31, 2018.