Kennington Company has outstanding debt that contains restrictive covenants limiting dividends to 15 percent of net income from continuing operations. During 2012, the company reported net income from operations of $ 235,000 after taxes, excluding the following items.

1. A $25,000 gain was recognized on the sale of an investment

2. A $62,000 loss was recognized on a lawsuit.

3. A $38,000 loss was recognized on the early retirement of debt.

Assume that the gain is (1) is taxable, the losses in (2) and (3) are tax deductible, and the company’s tax rate is 35 percent.

(a) Provide the income statement, beginning at net income from operations, and compute the maximum amount of dividends that the company can declare, assuming that (1) the investment in (1) is a business segment that broke even during 2012 and (2) lawsuit are common for Kennington.

(b) provide the income statement, beginning at the net income from operations, and compute the maximum amount of dividends that the company can declare, assuming that (1) the investment is (1) is a short-term equity security and (2) lawsuit are very rare for Kennington.