Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2021 and 2020:

		2021			2020
Sales revenue	$	15,700,000		$	10,300,000
Cost of goods sold		9,550,000			6,350,000
Gross profit		6,150,000			3,950,000
Operating expenses		3,480,000			2,880,000
Operating income		2,670,000			1,070,000
Gain on sale of division		670,000			—
		3,340,000			1,070,000
Income tax expense		835,000			267,500
Net income	$	2,505,000		$	802,500

On October 15, 2021, 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, 2021, for $5,210,000. Book value of the division’s assets was $4,540,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

2021	$435,000
2020	$335,000

Assume an income tax rate of 25%.

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, 2021, 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 $5,210,000. 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, 2021, 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 $3,970,000. 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
Income Statement (partial)
For the years ended December 31
	2021	2020
Income from continuing operations, before taxes **	$2,235,000	$735,000
Income tax expense @25%	$558,750.00	$183,750.00
Income from continuing operations (A)	$1,676,250.00	$551,250.00
Discontinued operations:
Income (loss) from discontinued component (including gain on disposal of in 2021) (670000+435000)	$1,105,000	$335,000
Income tax benefit (expense) ($1105000*25%), ($335000*25%)	($276,250)	($83,750)
Income(loss) on discontinued operations (B)	$828,750	$251,250
Net Income (A+B)	$2,505,000.00	$802,500.00

Working note:

**Income from continuing operations, before taxes:	2021	2020
Operating income with component included	$2,670,000	$1,070,000
Less: Income from discontinued operations	($435,000)	($335,000)
Income from continuing operatons before taxes	$2,235,000	$735,000

___________________________________________________________________

2.

Jackson Holding Company
Income Statement (partial)
For the years ended December 31
	2021
Income from continuing operations, before taxes	$2,235,000
Income tax expense @25%	$558,750.00
Income from continuing operations (A)	$1,676,250.00
Discontinued operations:
Income (loss) from discontinued component.	$435,000
Income tax benefit (expense) ($435000*25%)	($108,750)
Income(loss) on discontinued operations (B)	$326,250
Net Income (A+B)	$2,002,500.00

______________________________________________________________________

3.

Jackson Holding Company
Income Statement (partial)
For the years ended December 31
	2021
Income from continuing operations, before taxes	$2,235,000
Income tax expense @25%	$558,750.00
Income from continuing operations (A)	$1,676,250.00
Discontinued operations:
Income (loss) from discontinued component [including impairment loss of $(4,540,000 - $3,900,00 = $570,000)], ($570,000-$435,000)	$135,000
Income tax benefit (expense) ($135000*25%)	($33,750)
Income(loss) on discontinued operations (B)	$101,250
Net Income (A+B)	$1,777,500.00