2:At the beginning of its 2013 calendar‐year accounting period, Commet, Inc. had retained
earnings of $7,500,000. During 2013, Commet reported income from continuing operations
before taxes of $1,200,000. The following additional transactions occurred in 2013 but were not
included in the $1,200,000. Assume all of the following were material.
1. Commet had a restructuring charge of $17,000 (pre‐tax).
2. Commet had an uninsured flood loss of $275,000 (pre‐tax) which was considered to be
both unusual and infrequent in nature.
3. During 2013, Commet decided to sell an unprofitable segment of its business. The sale
of this segment qualifies as a discontinued operation for financial reporting purposes.
However, at the end of 2013, the company had yet to sell the segment. On December
31, 2013 the segment assets had a fair value minus anticipated costs to sell of
$3,800,000 and a book value of $4,100,000. For the year, the segment reported an
operating loss of $600,000.
4. Commet declared and paid cash dividends of $80,000 on its common stock.
5. At the beginning of 2010, the company purchased a machine for $60,000 and fully
expensed it during 2010. The company would normally have used the straight‐line
depreciation method with a $5,000 salvage value and 10 year useful life. This was
discovered as the accountant was reviewing the information for the 2013 financial
statements. Depreciation expense on this machine for 2013 was not included in the
a. Prepare an income statement for the year 2013, beginning with Income from Continuing
Operations before Taxes. Assume the tax rate was 40%.
b. What is the ending Retained Earnings balance for Commet, Inc. as of December 31,
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