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

EXERCISE 14-5

Purpose: (L.O. 5, 6) This exercise will enable you practice identifying the proper classification for items on an income statement. It will also give you an example of how the tax effects of various items are reflected in the income statement.

Eliason Inc. reported income from continuing operations before income taxes for 2014 of $700,000. The income tax rate on all items was 30%. Additional transactions occurring in 2014 but not considered in the $700,000 are as follows:

1. The corporation experienced an uninsured flood loss in the amount of $80,000 during the year. A flood is a very rare event in the area where the corporation is located.
2. The corporation disposed of its recreational division at a loss of $150,000 before the related tax effect. This transaction meets the criteria for being classified as discontinued operations. The income from operations for this division was $60,000 (before taxes) for 2014.

Instructions

Prepare a part of the income statement for the year 2014 starting with “Income before income taxes.”