Question

For its fiscal year ending October 31, 2018, Henderson Corporation reports the following partial data shown below.

Income before income taxes	$540,000
Income tax expense (20% × $420,000)	84,000
Income from continuing operations	456,000
Loss on discontinued operations	120,000
Net income	$336,000

The loss on discontinued operations was comprised of a $50,000 loss from operations and a $70,000 loss from disposal. The income tax rate is 20% on all items.

Instructions

1. Prepare a correct statement of comprehensive income beginning with income before income taxes.
2. Explain in memo form why the income statement data are misleading.

Answer 1

(a) Presentation of Correct Statement of Comprehensive Income

(Amount in $)

Particulars	Continuing Operation	Discontinuing operation	Total
Income Before Tax (1)	4,56,000	84,000	5,40,000
Less: Loss from Discontinuing Operations (2)	-	(50,000)	(50,000)
Less: Loss from Disposal of Discontined operation (3)	-	(70,000)	(70,000)
Total (1-(2+3))= (4)	4,56,000	(36,000)	4,20,000
Less: Income Tax Expense (5)	(91,200)	7,200	(84,000)

Net Income (4-5) 3,64,800 (28,800) 3,36,000

(b) Memo form as to why the information is misleading

When an enterprise disposes assets or settles liabilities attributeable to discontinuing operation the following other information are also disclosed:

• Amount of gain or loss recognised on the disposal of assets or settlement of liabilities and related income tax

In the earlier income statement the amounts attributeable to continuing operations and that relating to discontinuing or discontinued operations where not bifurcated thus was not providing with a true and fair view of the Financial position of the Compay as on 31st October 2018.