As demonstrated in parts a through c how a loss or

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Unformatted text preview: ons. Bonus = 12% [($800,000 – $480,000) (1 – Tax Rate)] = 12% [$320,000 (1 – 35%)] = $24,960 b. If the loss from the lawsuit is considered extraordinary, then the loss would not be used to compute net income from continuing operations. Bonus = 12% [$800,000 (1 – Tax Rate)] = 12% [$800,000 (1 – 35%)] = $62,400 c. Gain not considered extraordinary Bonus = 12% [($800,000 + $480,000) (1 – Tax Rate)] = 12% [$1,280,000 (1 – 35%)] = $99,840 Gain considered extraordinary Bonus = 12% [$800,000 (1 – Tax Rate)] = 12% [$800,000 (1 – 35%)] = $62,400 d. Income figures are often used as the basis for awarding incentive compensation to managers, or included in ratios which are, in turn, incorporated into debt covenants. If the income figures included in incentive contracts or in debt covenants stipulate between income from continuing operations and net income, then the decision of whether or not to classify an event as extraordinary or not can have economic consequences. As demonstrated in parts (a) through (c), how a loss or gain is classified can have a profound effect on the magnitude of a manager's bonus. E13–12 a. b. c. Income from continuing operations Disposal of business segment* Extraordinary loss Changes in accounting method Net earnings per share $ Income from continuing operations Disposal of business segment* Extraordinary loss Changes in accounting method Net earnings per share $ Income from continuing operations Disposal of business segment* Extraordinary loss Changes in accounting method Net earnings per share 0.73 0.33 (0.46) 0.40 1.00 $ $ 0.44 0.20 (0.28) 0.24 0.60 $ 0.37 0.16 (0.23) 0.20 0.50 $ * The EPS disclosure for the disposal of the business segment includes both the income from the disposed segment and the gain on the sale of the disposed segment. E13–13 a. Rothrock Consolidated Income Statement For the Year Ended December 31, 2012 Revenue: Operating revenues Total revenue 87,000 Expenses: Operating expenses 32,500 $ 87,000 $ Other revenue Income from continuing operations (before taxes) 59,700 Income tax expense 20,895 Income from continuing operations 38,805 Discontinued operations: Income earned by discontinued segment (net of taxes of $1,050) Loss on disposal of discontinued segment (net of tax benefit of $7,350) Discontinued operations (11,700) Income before extraordinary items 27,105 Extraordinary loss (net of tax benefit of $1,750) (3,250) Income before change in accounting method 23,855 Effect of change in accounting method (net of taxes of $4,375) Net income 31,980 5,200 $ $ $ 1,950 (13,650) $ $ 8,125 $ b. Rothrock Consolidated Statement of Retained Earnings For the Year Ended December 31, 2012 Retained earnings, January 1, 2012 Plus: Net income Less: Dividends declared Retained earnings, December 31, 2012 $ 72,000 31,980 (18,000) $ 85,980 E13–14 a. Watson Company Income Statement For the Year Ended December 31, 2012 Sales revenues $1,385,000 Cost of goods sold _ 475,000 Gross profit $ Operating expenses: 910,000 Administrative $ expenses 100...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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