Question

The following condensed income statements of the Jackson Holdings company are presented for the two years ended December 31, 2021 and 2020.

2021 2020

Sales Revenue $15,900,00 $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

gains on sale of divison 690,000 -

3,380,000 1,090,000

Income tax expenses 845,000 272,500

Net income 2,535,000 817,500

On October 15, 2021 Jackson entered into a tentative agreement to seel all the assets of one of its divisons. the divison 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 divisions 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

1. Prepare revised income statements according to GAAP, beginning with income from continuing operations before income taxes, Ignore EPS disclosures.

2. Asume that by december 31,2021 the divions had not yet been sold but was considered held for sale. The fair value of the divisons assets on december 31 was $5,270,000. prepare revised income statements accoring to GAAP, beginning with income from continuing operations before income taxes. ignore EPS disclosures.

3. Assume that by december 3, 2021, the division had not yet been sold but was considered held for sale. The fair value of the divisions asets on December 31 was $3,990,000. Prepare revised income statements according to GAAP, beginning with income from continuing operations before income taxes, ignore EPS disclosures.

Answer 1

Answer:

1) Income Statement:

Particulars	Year 2021	Year 2020
Income from continuing operations	2245000	745000
Income Tax Expense @ 25%	(561250)	(186250)
Income from continuing operations	1683750	558750
Discontinued operations
Income from discontinued operations	1135000	345000
Income Tax Expense @ 25%	(283750)	(86250)
Income from discontinued operations	851250	258750
Net Income	2535000	817500

Income from Continued operations = Operating income – The division’s contribution to jackson’s operating income before tax

For year 2021, 2,690,000 – 445,000 = 2,245,000

For year 2020, 1,090,000 – 345,000 = 745,000

2) Income Statement;

Particulars	Year 2021	Year 2020
Income from continuing operations before income taxes	2245000	745000
Income Tax expense @25%	(561250)	(186250)
Income from Continuing operations	1683750	558750
Discounted operations gain (loss)
Income from discontinued operations	445000	345000
Income Tax expense @25%	(111250)	(86250)
Income from discontinued operations	333750	258750
Net Income	2017500	817500

3) Income Statement:

Particulars	Year 2021	Year 2020
Income from continuing operations before income taxes	2245000	745000
Income Tax expense @25%	(561250)	(186250)
Income from Continuing operations	1683750	558750
Discounted operations gain (loss)
Income from discontinued operations	-145000	345000
Income Tax expense @25%	36250	(86250)
Income from discontinued operations	-108750	258750
Net Income	1575000	817500

Discontinued operations gain/loss = The division’s contribution to jackson’s operating income before tax – (Book value of the division’s assets – Fair value of the divisions assets)

For year 2021, 445,000 – (4,580,000 – 3,990,000) = -145,000

For year 2020, = 345,000

Note: Net Income = Income from continuing operations + Income from discontinued operations