Morton Manufacturing maintains a credit line with First Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company’s dividends in any one year to 20 percent of net income. The 2018 income statement data of Morton Manufacturing is as follows:

Sales ........................................................................................$840,000
Less: Cost of goods sold ...........................................................570,000
Gross profit ..............................................................................$270,000
Selling and administrative expenses .............................,,,,,.......120,000
Net operating income ..................................................,,,,........$150,000
Gain on sale of investments ........................................................14,000
Interest expense ..........................................................................(4,000)
Net income from continuing operations before tax .................$160,000
Less: Income tax expense ..........................................................51,200
Net income from continuing operations ..................................$108,800
Extraordinary gain (net of tax) ....................................................22,000
Net income before change in accounting principle .................$130,800
Income on accounting change ...................................................52,000
Net income $182,800
a. Compute the maximum amount of dividends Morton can pay if the debt covenant is expressed as 20 percent of each of the following:
(1) Net income
(2) Income before change in accounting principle
(3) Income before extraordinary items (from continuing operations)
(4) Net operating income
b. Explain why the bank may wish to state the contractual limitation on dividends in terms of income from operations instead of net income.