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 $ 16,800,000 $ 11,400,000 Cost of goods sold 10,100,000 6,900,000 Gross profit 6,700,000 4,500,000 Operating expenses 3,920,000 3,320,000 Operating income 2,780,000 1,180,000 Gain on sale of division 780,000 — 3,560,000 1,180,000 Income tax expense 890,000 295,000 Net income $ 2,670,000 $ 885,000 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 $5,540,000. Book value of the division’s assets was $4,760,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows: 2021 $490,000 2020 $390,000 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 $5,540,000. 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 $4,080,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

Answer 1

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