Question

On October 5, 2020, Diamond in the Flounder Recruiting Group Inc.’s board of directors decided to dispose of the Blue Division. A formal plan was approved. Diamond derives approximately 73% of its income from its human resources management practice. The Blue Division gets contracts to perform human resources management on an outsourced basis. The board decided to dispose of the division because of unfavourable operating results. Net income for Diamond was $95,970 for the fiscal year ended December 31, 2020 (after a charge for tax at 30% and after a writedown for the Blue assets). Income from operations of the Blue Division accounted for $4,270 (after tax) of this amount. Because of the unfavourable results and the extreme competition, the board believes that it cannot sell the business intact. Its final decision is to auction off the office equipment. The equipment is the division’s only asset and has a carrying value of $23,000 at October 5, 2020. The board believes that proceeds from the sale will be approximately $6,000 after the auction expenses. Currently, the equipment’s estimated fair value is $9,600. The Blue Division qualifies for treatment as a discontinued operation. Diamond prepares financial statements in accordance with ASPE.

Prepare a partial income statement for Diamond in the Flounder Recruiting Group. The income statement should begin with income from continuing operations before income tax.

Answer 1

Partial income statement for Diamond in the Flounder Recruiting Group is as follows :

Income from continuing operations before income tax $148,000

Income from discontinued operations before income tax ($10,900)

Net profit $137,100

Less Tax @ 30%   ($41,130)

Profit after Tax $97,970

Calculation of Income from continuing operations before income tax is as below:

Net income after tax and writedown of Blue = $95,970

Before tax , Income = $95,970/0.70 = $137,100

Income before tax $137,100

reversal of written down of Blue Division $17,000

Income from operations of the Blue Division ($6,100)

Income from continuing operations before income tax $148,000

Calculation of Income from discontinued operations before income tax is as below :

Net income after tax of Blue Division $ 4,270

Add: tax 4270/0.7*0.30 $1,830

Less: loss on sale of equipment $17,000

Income from discontinued operations before income tax ($10,900)