Question

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

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 $5,000,000. Book value of the division’s assets was $4,400,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:
2021 ...................$400,000
2020 ..................$300,000
Assume an income tax rate of 25%.

 

Required:
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 $5,000,000. What would be the amount presented for discontinued operations?
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 $3,900,000. What would be the amount presented for discontinued operations?

Answer 1

1.

JACKSON HOLDING COMPANY
Comparative Income Statements (in part)
For the Years Ended December 31
	2021		2020
Income from continuing operations before
income taxes [1] ......................................	$2,200,000		$700,000
Income tax expense .....................................	550,000		175,000
Income from continuing operations ............	1,650,000		525,000
Discontinued operations:
Income from operations of discontinued  component (including gain on disposal of  $600,000 in 2021) [2] .....................................	1,000,000		300,000
Income tax expense ...................................	(250,000)		(75,000)
Income from discontinued operations .........	750,000		225,000
Net Income ..................................................	$2,400,000		$750,000

[1]   Income from continuing operations before income taxes:

                                                                                              2021                2020

       Unadjusted                                                            $2,600,000      $1,000,000

       Less: Income from discontinued operations        400,000           300,000

       Adjusted                                                                 $2,200,000        $ 700,000

 

[2]         Income from discontinued operations:

                                                                               2021                  2020

       Income from operations                         $ 400,000       $300,000

       Gain on disposal                                          600,000                  -

       Total                                                         $1,000,000       $300,000

 

2.

The 2021 income from discontinued operations would include only the income from operations of $400,000. Net of $100,000 income tax expense, the income from discontinued operations would be presented as $300,000.

 

Since no impairment loss is indicated ($5,000,000 – 4,400,000 = $600,000 anticipated gain), none is included. The anticipated gain on disposal is not recognized until it is realized, presumably in the following year.

 

3.

The 2021 income from discontinued operations would include the income from operations of $400,000 as well as an impairment loss of $500,000 ($4,400,000 book value of assets less $3,900,000 fair value). The net amount to report would be a loss on discontinued operations of $100,000 ($400,000 income from operations less $500,000 impairment loss). Net of $25,000 income tax benefit, the loss from discontinued operations would be presented as $(75,000).

 Total                                                         $1,000,000       $300,000