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B carmichindustries incomestatement

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Unformatted text preview: of $ $8,750) 16,250b Gain on disposal of discontinued segment (net of tax expense of $45,850) 85,150c Discontinued operations 101,400 Net income $ 1,355,900 a $675,500 = $1,930,000 35% Income = Revenues – Expenses (1 – tax rate) $16,250 =($145,000 – $120,000 (1 – 35%) b c Gain = Sale price – Book value (1 – tax rate) $85,150 = [$350,000 – ($437,000 – $218,000] (1 – 35%) E13–8 Concluded Earnings persistence reflects the extent to which a particular dollar of earnings can be expected to continue in the future. A user would expect the income from continuing operations of $1,254,500 to continue in the future, but interpret the income and gain from the discontinued division to reflect a one­time increase in earnings that is not expected to be realized in the future. b. Carmich Industries Income Statement For the Year Ended December 31, 2012 Income from continuing operations (before taxes) Income tax expense Net income a $ $ 1,955,000a 684,250b 1,270,750 Income from continuing operations = Income excluding clerical division + Activities of clerical division $1,955,000 = $1,930,000 + $25,000 b $684,250 = $1,955,000 35% A user would expect the entire amount of net income to persist in the future. No items are separated out as one­time, unusual, and/or infrequent. c. Rob Blandig faces a number of trade­offs as he decides whether to complete the sale in 2012 or 2013. First, income is already positive and strong in 2012. The gain from the sale increases net income by only $85,150, only 6.7%,. If Carmich Industries anticipates a weaker 2013, it may be more beneficial to the income statement to wait until 2013 in order to offset poorer performance. Also, by selling in 2012, recurring income from operations isn’t as large as it could be. Users would interpret the financial statements as $1,254,500 persisting into the future versus $1,270,750 if the division isn’t sold until 2013. Also, Rob and other top management receive a 20% bonus on income from continuing operations. This means that top management earns an additional 20% on the income from the division if it is not sold in 2012. On the other hand, Carmich Industries may face debt convenants that need to be covered by a larger amount of income. Also, Rob may be able to use the cash from the sale to invest in alternative projects that immediately earn a higher return than produced by the chemical division and increase income and his bonus even higher next year. E13–9 a. Net Sales is the revenue generated by selling products/services to customers. Operating expenses are those charges that make the revenue possible. Operating income is the profitability associated with the basic (recurring) operations of the company. Net cost of debt is the interest expense net of any interest income. Income taxes is the expense related to the taxes incurred on the company’s profits. Net income of equity­accounted affiliates is Group Danone’s share of the income of companies in which Danone owns a significant (but not controlling) portion; this income statement item is a non­cash addition to profitability. Net income from continuing operations is the b...
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