Question

Problem 4-2 Discontinued operations [LO4-4]

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	$	15,300,000		$	9,900,000
Cost of goods sold		9,350,000			6,150,000
Gross profit		5,950,000			3,750,000
Operating expenses		3,320,000			2,720,000
Operating income		2,630,000			1,030,000
Gain on sale of division		630,000			—
		3,260,000			1,030,000
Income tax expense		652,000			206,000
Net income	$	2,608,000		$	824,000

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 $5,090,000. Book value of the division’s assets was $4,460,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

2018	$415,000
2017	$315,000

Assume an income tax rate of 20%.

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 $5,090,000. 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 $3,930,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

Answer 1

Solution:

1) Prepare revised income statement as shown below:

Particulars	2018	2017
Income from operations	$ 2,215,000 ($2,630,000 - $415,000)	$ 715,000 ($1,030,000 - $315,000)
Income Tax expenses @ 20%	$ 443,000	$ 143,000
Income from continuing operations(A)	$ 1,772,000	$ 572,000
Income from Discontinued operations	$1,045,000 ($ 630,000+$ 415,000)	$ 315,000
Income Tax expenses on discontinued operations @ 20%	$ 209,000	$ 63,000
Income from discontinued operations (B)	$ 836,000	$ 252,000
Net income(C =A+B)	$ 2,608,000	$ 824,000

2) Revised income statement

Particulars	2018	2017
Income from operations	$ 2,215,000 ($2,630,000 - $415,000)	$ 715,000 ($1,030,000 - $315,000)
Income Tax expenses @ 20%	$ 443,000	$ 143,000
Income from continuing operations(A)	$ 1,772,000	$ 572,000
Income from Discontinued operations	$ 415,000	$ 315,000
Income Tax expenses on discontinued operations @ 20%	$ 83,000	$ 63,000
Income from discontinued operations (B)	$ 332,000	$ 252,000
Net income(C =A+B)	$2,104,000	$ 824,000

3) Revised income statement as shown below:

Particulars	2018	2017
Income from operations	$ 2,215,000 ($2,630,000-$415,000)	$ 715,000 ($1,030,000-$315,000)
Income Tax expenses @ 20%	$ 443,000	$ 143,000
Income from continuing operations(A)	$ 1,772,000	$ 572,000
Income/Loss from Discontinued operations	($ 115,000)    ($530,000 - $ 415,000)	$ 315,000
Income Tax expenses/(savings) on discontinued operations @ 20%	($ 23,000)	$ 63,000
Income / (loss) from discontinued operations (B)	($ 138,000)	$ 252,000
Net income(C =A+B)	$ 1,910,000	$ 824,000

Note:

The $530,000 is the original book value of $4,460,000-the new fair value of $3,930,000 explained in 3. $4,460,000-$3,930,000 = $530,000