Question

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 2014 when Smithfield repurchased and retired $1 million of its 8% term bonds (scheduled to mature in 2018). Smithfield’s income tax rate is 35%; 250,000 shares of common stock were outstanding during 2014.
Income Statement for the Year Ended December 31, 2014
Sales ...................... $3,512,000
Cost of goods sold ................. (2,177,440)
Gross profit ................... 1,334,560
Selling and administrative expenses ......... (772,640)
Income from operations, before income taxes ...... 561,920
Income taxes ..................... (196,672)
Net income ................... $ 365,248
Earnings per share ................. $ 1.4

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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  • CreatedSeptember 10, 2014
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