For its fiscal year ending October 31, 2012, Reed Corporation

For its fiscal year ending October 31, 2012, Reed Corporation reports the following partial data shown below.

Income before income taxes                             $540,000
Income tax expense (30% 3 $390,000)               
117,000
Income before extraordinary items                     423,000
Extraordinary loss from flood                             150,000
Net income                                                         
$273,000

The flood loss is considered an extraordinary item. The income tax rate is 30% on all items.
Instructions
  (a) Prepare a correct income statement, beginning with income before income taxes.
  (b) Explain in memo form why the income statement data are misleading.