Question

For the year ending December 31, 2021, Olivo Corporation had income from continuing operations before taxes of $1,200,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material.

1. In November 2021, Olivo sold its PizzaPasta restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May 2021. The income from operations of the chain from January 1, 2021, through November was $160,000 and the loss on sale of the chain’s assets was $300,000.
2. In 2021, Olivo sold one of its six factories for $1,200,000. At the time of the sale, the factory had a book value of $1,100,000. The factory was not considered a component of the entity.
3. In 2019, Olivo’s accountant omitted the annual adjustment for patent amortization expense of $120,000. The error was not discovered until December 2021.

 

Required:
Prepare Olivo’s income statement, beginning with income from continuing operations before taxes, for the year ended December 31, 2021. Assume an income tax rate of 25%. Ignore EPS disclosures.

Answer 1

OLIVO CORPORATION
Partial Income Statement
For the Year Ended December 31, 2021
Income from continuing operations before   income taxes .......................................			[1] $1,300,000
Income tax expense ................................			325,000
Income from continuing operations........			975,000
Discontinued operations:
Loss from operations of discontinued   component (including loss on disposal of  $300,000) .............................................	$(140,000)
Income tax benefit ...............................	35,000
Loss on discontinued operations ............			[2]  (105,000)
Net income .............................................			$  870,000

[1] Income from continuing operations before taxes:

            Unadjusted                                                          $1,200,000

            Add: Gain from sale of factory                              100,000

            Adjusted                                                              $1,300,000

 

     [2]   Loss on discontinued operations:

            Income from operations                                         $ 160,000

            Deduct: Loss on sale of assets                                 (300,000)

            Loss before tax                                                           (140,000)

            Tax benefit (25% × $140,000)                                       35,000

            Loss on discontinued operations                          $(105,000)

Loss on discontinued operations                          $(105,000)