Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 14-4

COMPANY NAME Income Statement For the Year Ended December 31, 20XX

1. (b) Revenues
2. (g) Expenses
3. (j) Income before income taxes
4. (d) Income tax expense
5. (c) Income from continuing operations
6. (e) Discontinued operations:
7. (k) Loss from operations of discontinued segment of business (net of tax)
8. (h) Loss from disposal of assets of discontinued segment of business (net of tax)
9. (a) Income before extraordinary item
10. (f) Extraordinary gain (net of tax)
11. (i)Net income

TIP: Income taxes should be associated with the item that affects the taxes. Thus, the income tax consequences of all items appearing above the line “Income before income taxes” are summarized in the line “Income tax expense.” Revenues cause an increase in income taxes and expenses cause a decrease in income taxes. The income tax consequences of items appearing below the “Income from continuing operations” line are included with the items (hence, these items are reported “net of tax”).

TIP: An extraordinary item is reported “net of tax” by deducting the tax effect from the related gain or loss. For example, if the tax rate is 30%, an extraordinary gain of $400,000 will be reported at $280,000 net of tax. Likewise, an extraordinary loss of $400,000 will be reported at $280,000 net of tax. The gain situation increases net income whereas the loss reduces it.