Lanestar Inc. reported income from continuing operations before tax of$1,790,000 during 2014. Additional transactions occurring in 2014 but not included in the $1,790,000 are as follows:
1. T he corporation experienced an insured flood loss of $80,000 during the year.
2. At the beginning of 2012, the corporation purchased a machine for $54,000 (residual value of $9,000) that had a useful life of six years. The bookkeeper used straight-line depreciation for 2012, 2013, and 2014, but failed to deduct the residual value in calculating the depreciable amount.
3. T he sale of fair value-net income investments resulted in a loss of$107,000.
4. When its president died, the corporation gained $100,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is non taxable).
5. T he corporation disposed of its recreational division at a loss of $115,000 before tax. Assume that this transaction meets the criteria for accounting treatment as discontinued operations.
6. T he corporation decided to change its method of inventory pricing from average cost to the FIFO method. The effect of this change on prior years is to increase 2012 income by $60,000 and decrease 2013 income by $20,000 before taxes. The FIFO method has been used for 2014.
Instructions
(a) Prepare an income statement for the year 2014 starting with income from continuing operations before income tax. Calculate earnings per share as required under IFRS. T here were 80,000 common shares outstanding during the year. (Assume a tax rate of 30% on all items, unless they are noted as being non-taxable.)
(b) Assume that beginning retained earnings for 2014 is $2,540,000 and that dividends of $175,000 were declared during the year. Prepare the retained earnings portion of the statement of changes in equity for 2014.
(c) Discuss how proper classification and disclosure of items on the income statement help users in making their investment and credit decisions.