Madigan International is planning a major stock issuance in early 2019. During 2018, the company reported net income from operations of $865,000 before taxes. The following four items describe major events that occurred during 2018.
1. A $42,000 gain was recognized on the sale of a subsidiary.
2. Inventory was written down by $53,000 due to earthquake damage.
3. Inventory of $38,000 was written off.
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 35 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 2019, and provide a rationale for why Madigan may have made such choices.