Question

1. On November 30, 2017, Rocky Co. decided to dispose of a component A. The sale was not complete

at the end of 2017. During 2017, this component generated operating income of $200,000. The

historical cost of component A is $1,200,000 and the Accumulated Depreciation for component A on

December 31, 2017 was $500,000. At December 31, 2017, the fair value of component A was

estimated at $710,000 and the cost to sell component A was estimated to be $50,000. Rocky has a

30% tax rate in all years.

a) Provide the journal entry to record any impairment of Component A in 2017.

b) Provide the Discontinued Operations Section of the 2017 Multistep Income Statement.

Rocky Co. sold component A on May 17, 2018 for a sales price of $735,000 with sales commissions

of $45,000. During 2018, component A generated operating income of $100,000. Rocky’s common

shares outstanding at the end of 2017 and 2018 were 500,000 and 700,000 shares, respectively. In

2018, Rocky declared a preferred stock dividend of $30,000, but only paid $24,000 of the dividend in

2018. In 2018, Rocky declared a common stock dividend of $60,000 and only paid $40,000.

c) Provide the 2018 Partial Income Statement, starting with Income from Continuing Operations

Before Taxes of $900,000. Include the first four lines and EPS information. Good format is

required.

d) Provide the journal entry to record the disposal of Component A. GJEF is required.

Answer 1

As per AS-26, Impairment of Fixed Assets, Impairment required to debited to Profit & Loss account:
Part-(A)	Calculations of Impairment Loss on the Component-A
	Historical Cost	$ 1,200,000.00
Less :	Accumulated Depreciation	$     500,000.00
	Book Value	$      700,000.00
	Fair Market Value	$      710,000.00
Less :	Selling expenses	$        50,000.00
	Recoverable amount	$      660,000.00
	Difference in Value	$        40,000.00
	Journal entry for Impairment
Dr.	Impairment Loss a/c	$        40,000.00
Cr.	To Accumulated Impairment Loss a/c	$        40,000.00
Part-(B)	Actual amount received from sale of component
	Sale amount	$      735,000.00
Less :	Commission amount	$        45,000.00
	Net Proceeds	$      690,000.00
	Book value of Component-A	$      700,000.00
	Loss on disposal	$        10,000.00
	INCOME STATEMENT
	Operating Income	$      100,000.00
Less :	Loss on disposal	$        10,000.00
	Income before tax	$        90,000.00
	Tax @30%	$        27,000.00
	Profit after tax	$        63,000.00
Less :	Preferred stock dividend	$        30,000.00
	NET INCOME	$        33,000.00
Note:	Dividends on common stock are not reported on the income statement since they are not expenses. Dividends on preferred stock are not expenses, but will be deducted from net income in order to report the earnings available for common stock on the income statement.
Part-(C)	INCOME STATEMENT
	Operating Income	$      900,000.00
Less :	Loss on disposal	$        10,000.00
	Income before tax	$      890,000.00
	Tax @30%	$      267,000.00
	Profit after tax	$      623,000.00
Less :	Stock dividend Paid	$        40,000.00
	NET INCOME	$      583,000.00
	Oustanding Stock in 2018	700000
	EPS	$                  0.83
Part-(D)
	Journal entry for Disposal of Component-A
Dr.	Cash/Bank a/c	$      660,000.00
Dr.	Accumulated Depreciation a/c	$      500,000.00
Dr.	Loss on sale of Component-A a/c	$        40,000.00
Cr.	Component-A (Fixed assets) a/c	$ 1,200,000.00