Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2018 and 2017:

		2018			2017
Sales	$	17,000,000		$	11,600,000
Cost of goods sold		10,200,000			7,000,000
Gross profit		6,800,000			4,600,000
Operating expenses		4,000,000			3,400,000
Operating income		2,800,000			1,200,000
Gain on sale of division		800,000			—
		3,600,000			1,200,000
Income tax expense		1,080,000			360,000
Net income	$	2,520,000		$	840,000

On October 15, 2018, 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, 2018, for $5,600,000. Book value of the division’s assets was $4,800,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

2018	$500,000
2017	$400,000

Assume an income tax rate of 30%.

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, 2018, 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 $5,600,000. 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, 2018, 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 $4,100,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

Answer 1

1)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2018	2017
Income from continuing operations before income taxes (1)	$          33,00,000.00	$                16,00,000.00
Income tax expense @ 30%	$          -9,90,000.00	$                -4,80,000.00
Income from continuing operations	$          23,10,000.00	$                11,20,000.00
Discontinued operations:
Income (loss) from operations of discontinued component (2)	$            3,00,000.00	$                -4,00,000.00
Income tax benefit (expense)	$             -90,000.00	$                  1,20,000.00
Income (loss) on discontinued operations	$            2,10,000.00	$                -2,80,000.00
Net Income	$          25,20,000.00	$                  8,40,000.00
1) Income from continuing operations before Income Taxes
	2018	2017
Unadjusted Income	$          28,00,000.00	$                12,00,000.00
Add: Loss from discontinued operations	$            5,00,000.00	$                  4,00,000.00
Adjusted	$          33,00,000.00	$                16,00,000.00
2) Income from discontinued operations:
Loss from operations	$          -5,00,000.00	$                -4,00,000.00
Gain on disposal	$            8,00,000.00
Total	$            3,00,000.00	$                -4,00,000.00
2)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2018	2017
Income from continuing operations before income taxes (1)	$          33,00,000.00	$                16,00,000.00
Income tax expense @ 3%	$          -9,90,000.00	$                -4,80,000.00
Income from continuing operations	$          23,10,000.00	$                11,20,000.00
Discontinued operations:
Income (loss) from operations of discontinued component	$          -5,00,000.00	$                -4,00,000.00
Income tax benefit (expense)	$            1,50,000.00	$                  1,20,000.00
Income (loss) on discontinued operations	$          -3,50,000.00	$                -2,80,000.00
Net Income	$          19,60,000.00	$                  8,40,000.00
The 2018 income from discontinued operations would include only the loss from operations   of   $500,000.   Since   no   impairment   loss   is   indicated   ($5,600,000 – 4,800,000 = $800,000 anticipated gain), none is included. The anticipated gain on disposal is not recognized until it is realized, presumably in the following year.
3)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2018	2017
Income from continuing operations before income taxes (1)	$          33,00,000.00	$                16,00,000.00
Income tax expense @ 30%	$          -9,90,000.00	$                -4,80,000.00
Income from continuing operations	$          23,10,000.00	$                11,20,000.00
Discontinued operations:
Income (loss) from operations of discontinued component	$        -12,00,000.00	$                -4,00,000.00
Income tax benefit (expense)	$            3,60,000.00	$                  1,20,000.00
Income (loss) on discontinued operations	$          -8,40,000.00	$                -2,80,000.00
Net Income	$          14,70,000.00	$                  8,40,000.00
The 2018 income from discontinued operations would include the loss from operations of $500,000 as well as an impairment loss of $700,000 ($4,800,000 book value of assets less $4,100,000 fair value).