The income statement of Smithfield Beverage, Inc. that follows does not include any required reporting related to a \($62,000\) pre-tax gain that was realized in 2008 when Smithfield repurchased and retired \($1\) million of its 8% term bonds (scheduled to mature in 2015). Smithfield’s income tax rate is 35%; 250,000 shares of common stock were outstanding during 2008.

Required:
Discuss any modifications to Smithfield’s income statement necessitated by this gain under each of the following independent assumptions (do not produce “corrected” income statements):
1. Such early debt retirements are part of Smithfield’s risk management strategy.
2. Smithfield has been in business for 65 years. The company occasionally issues term bonds, but has not previously retired bonds prior to normal maturity.

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Income Statement for the Year Ended December 31, 2008 Sales Cost of goods sold Gross profit Selling and administrative expenses Income from operations, before income taxes Income taxes Net income Earnings per share $3,512,000 (2,177,440) 1,334,560 (772,640) 561,920 (196,672) $ 365,248 $ 1.46