Madigan international is planning a major stock issuance in early 2013. During 2012, the company reported net income from operations of $865,000 before taxes. The four items below describe major events that occurred during 2012. The company’s accountant chose to include items (1) and (4) in the computation of the net income from continuing operations and to disclose items (2) and (3) as extraordinary items.

1. A $42,000 gain was recognized on the same of a subsidiary.

2. Inventory was written down by $53,000 due to earthquake damage.

3. An outstanding accounts receivable of $ 38,000 was written off when a major customer declared bankruptcy.

4. A $25,000 gain was recognized due to the change of an accounting principle.

Assume that items (1) and (4) are taxable, items (2) and (3) are tax deductible, and the company’s tax rate is 5 percent.

(a) Present the income statement, beginning with net income from operations.

(b) Critique the accounting treatment chosen by Madigan’s accountants, and provide an income statement that is consistent with generally accepted accounting principles.

(c) Discuss how Madigan’s accounting treatment could influence the price at which the company’s stock is sold in 2012, and provide a rationale for why Madigan may have made such choices.