Madigans original treatment makes future income look

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Unformatted text preview: ns than actually exists. The greater is income from continuing operations, the more income investors and users expect will exist in the future. The gain on the sale of the subsidiary should be reported as a discontinued operation separately after income from continuing operations. The gain from the change in accounting principles should be reported separately after income from continuing operations. The loss due to the earthquake may be extraordinary as reported by Madigan, depending on the location of Madigan and the magnitude of the earthquake. The loss due to a write­off of accounts receivable, however, occurs in the ordinary course of business and should not be reported as an extraordinary item. E13–16 Concluded The income statement that is consistent with GAAP follows. Madigan International Income Statement For the Year Ended December 31, 2012 Income from continuing operations (before taxes) $ 865,000 Loss due to write­off of accounts receivable (38,000) Income from continuing operations $ Income tax expense 827,000 289,450a Income from continuing operations $ Gain on discontinued operations, (net of tax expense of $14,700) 27,300 Extraordinary loss on inventory due to earthquake, (net of tax benefit of $18,550) (34,450) Gain due to change in accounting principle, (net of tax expense of $8,750) 16,250 9,100 Net income $ $ a 537,550 546,650 $289,450 = $827,000 35% c. Madigan’s original treatment makes future income look more favorable. Stock prices tend to follow a multiple of earnings, so higher future income would lead to a higher future stock price. E13–17 a. 2011 2012 2013 2014 2015 Net Income 250,000 ­200,000* 50,000 250,000 ­200,000* 50,000 250,000 ­200,000* 50,000 250,000 ­200,000* 50,000 250,000 ­200,000* 50,000 Balance Sheet Value *straight­line depreciation expense = $1,000,000/5 years **Book Value = Cost – Accumulated Depreciation 800,000** 600,000 400,000 200,000 0 E13–17 Concluded b. Net Income 2011 2012 2013 2014 2015 Balance Sheet Value 250,000 ­400,000* (150,000) 250,000 ­240,000* 10,000 250,000 ­144,000* 106,000 250,000 ­ 86,400* 163,600 250,000 ­129,600* 120,400 600,000** 360,000 216,000 129,600 0 *double declining balance depreciation expense = 2 x Book Value/5 years **Book Value = Cost – Accumulated Depreciation c. d. Net Income 2011 Balance Sheet Value 250,000 ­210,000* 40,000 2012 250,000 ­168,000* 82,000 2013 250,000 ­190,000* 60,000 2014 250,000 ­ 205,000* 45,000 2015 250,000 ­227,000* 23,000 *depreciation expense = change in market value **Book Value = Cost – Accumulated Depreciation 790,000** 622,000 432,000 227,000 0 All three approaches yield the same total profitability over five years (each method totals $250,000 in profitability), but the methods allocate those profits differently. The straight­line method produces equal profits of $50,000 per year, while the double­declining balance method results in lower net income in the earlier years (due to the acceleration of the depreciation expenses) and higher net income in the later y...
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