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	$	16,600,000		$	11,200,000
Cost of goods sold		10,000,000			6,800,000
Gross profit		6,600,000			4,400,000
Operating expenses		3,840,000			3,240,000
Operating income		2,760,000			1,160,000
Gain on sale of division		760,000			—
		3,520,000			1,160,000
Income tax expense		880,000			290,000
Net income	$	2,640,000		$	870,000

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 $5,480,000. Book value of the division’s assets was $4,720,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

2021	$480,000
2020	$380,000

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 $5,480,000. 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 $4,060,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.
  

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2
• Required 3

Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Discontinued operations are the results of operations of a component of an entity that is either being held for sale or which has already been disposed of.

Jackson holding company

income statement for period ending 31 Dec 2021

amount (in $)

Income from continued operation (operating income before tax)

(27,60,000-4,80,000) (a) 22,80,000

Tax on continued operation (b)    -5,70,000

income from continued operation c=a-b 17,10,000

income from operation of discontinued operation net of tax(4,80,000*75/100) d 3,60,000

income from disposal of division ( sale value- book value) e 5,70,000

(54,80,000-47,20,000) *75/100

net effect of income from discontinued operation f=d+e 9,30,000

2. division held for sale    

Jackson holding company

income statement for period ending 31 Dec 2021

amount (in $)

Income from continued operation (operating income before tax)

(27,60,000-4,80,000) (a) 22,80,000

Tax on continued operation (b)    -5,70,000

income from continued operation c=a-b 17,10,000

income from operation of discontinued operation net of tax(4,80,000*75/100) d 3,60,000

* A disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell . in the above case lower of the carrying amount or fair value is determined below

fair value $54,80,000 and carrying amount that is book value is 47,20,000 , so disposal group will measured at lower of fair value or carrying amount that is 47,20,000.

3.

division held for sale assume fair value is $   

Jackson holding company

income statement for period ending 31 Dec 2021

amount (in $)

Income from continued operation (operating income before tax)

(27,60,000-4,80,000) (a) 22,80,000

Tax on continued operation (b)    -5,70,000

income from continued operation c=a-b 17,10,000

income from operation of discontinued operation net of tax(4,80,000*75/100) d 3,60,000

* A disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell . in the above case lower of the carrying amount or fair value is determined below

fair value $40,60,000 and carrying amount that is book value is 47,20,000 , so disposal group will measured at lower of fair value or carrying amount that is 40,60,000.