Creighton Corp, a textile manufacturer, reported net income of $258,000 in 2012 . During 2012 Creighton reported a gain of $29,800 from the sale of three used delivery trucks. The gain was included as part of income from continuing operations. Assuming
that the gain is a one-time event and that Creighton has an effective tax rate of 35% calculate Creighton's adjusted net income. Show all of your calculations for credit. In addition, discuss why analysts might make an adjustment of this type.
Creighton's income statement:
Adjusted
As Reported Totals
Income before tax (X - .35X = $396,923) $396,923 $367,123
Income tax expense (35%) (138,923) (128,493)
Net Income $258,000 $238,630
The analyst may decide to adjust income totals because the gains or losses do not relate to the sale of the company's principal products and services. Normally, only gains and losses from the sale of principal products and services should enter the forecasts of future earnings and profitability.
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