Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2021 and 2020:

		2021			2020
Sales revenue	$	15,900,000		$	10,500,000
Cost of goods sold		9,650,000			6,450,000
Gross profit		6,250,000			4,050,000
Operating expenses		3,560,000			2,960,000
Operating income		2,690,000			1,090,000
Gain on sale of division		690,000			—
		3,380,000			1,090,000
Income tax expense		845,000			272,500
Net income	$	2,535,000		$	817,500

On October 15, 2021, Jackson entered into a tentative agreement to sell the assets of one of its divisions. The division qualifies as a component of an entity as defined by GAAP. The division was sold on December 31, 2021, for $5,270,000. Book value of the division’s assets was $4,580,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

2021	$445,000
2020	$345,000

Assume an income tax rate of 25%.

Required: (In each case, net any gain or loss on sale of division with annual income or loss from the division and show the tax effect on a separate line.)
1. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.
2. Assume that by December 31, 2021, the division had not yet been sold but was considered held for sale. The fair value of the division’s assets on December 31 was $5,270,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.
3. Assume that by December 31, 2021, the division had not yet been sold but was considered held for sale. The fair value of the division’s assets on December 31 was $3,990,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

Assume that by December 31, 2021, the division had not yet been sold but was considered held for sale. The fair value of the division’s assets on December 31 was $3,990,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures. (Amounts to be deducted should be indicated with a minus sign.)

	JACKSON HOLDING COMPANY Comparative Income Statements (in part) For the Years Ended December 31 2021 2020 Income from continuing operations before income taxes Income from continuing operations 0 0 Discontinued operations gain (loss): Income from discontinued operations Net income $ $

Answer 1