Question

Lecondo Company is engaged in the manufacture and sale of fitness apparel. Several years ago it bought a health food business that has incurred losses since its acquisition. In 2018, the company sold the health food business. The results of operations and other activities for 2018 are summarized below.

                   Fitness Apparel        Health foods

Net sales               $17,400,000           $2,600,000

Cost of goods sold              8,100,000              1,700,000

Other operating expenses          4,700,000             1,200,000

Other:

The health food business was sold in September 2018 at a disposal loss of $500,000.

Treasury stock that had been acquired in 2017 for $130,000 was sold in 2018 for $195,000. The difference between cost and reissue price is not taxable.

During 2018, Lecondo sold 10,000 shares of its previously unissued $10 par value common stock to the public at a price of $27 per share.

Interest revenue of $2,000 was earned during 2018.

Cash dividends declared and paid during 2018 amounted to $700,000.

The fitness apparel division sold land at a $98,000 gain during 2018.

All of the foregoing amounts are before considering the effects of income taxes. The income tax rate is 40%.

Required: Calculate the following amounts that would appear on Lecondo’s income statement. Be alert for items that should not be included in the computation of net income.

Gross profit

Operating income

Income from continuing operations before taxes

Income from continuing operations

Net income

Check figures:

b. Operating income, $4,600,000

c. Income from continuing operations (before taxes), $4,700,000

d. Income from continuing operations (after taxes), $2,820,000

e. Net income, $2,340,000

Answer 1

• Since 'Health food business' segment has been sold during the year, any income (Or loss) from the operations of health food business during the year (including any income (Or loss) from the sale of health food business segment) shall be reported as ''Income (Or loss) from discontinued operations''. In other words any income or loss from health food business segment shall not form part of Lecondo Company's ''Income from continuing operations''.

Net sales		$17,400,000
Cost of Goods Sold		($8,100,000)
Gross Profit		$9,300,000
Other Operating Expenses		($4,700,000)
Operating Income		$4,600,000
Add: Non-Operating income (Or Other Income)
Interest	$2,000
Gain on sale of land (of fitness apparel division)	$98,000	$100,000
Income from continuing operations (before taxes)		$$4,700,000
Income taxes @40% [$4,700,000 x 40%]		($1,880,000)
Income from continuing operations (after taxes)		$2,820,000
Loss from Discontinued operations, net of Income tax benefit - (Note 1)		$480,000
Net Income		$2,340,000

Note 1 - Calculation of Income (Or loss) from discontinued operations

Discontinued operation - Health food business

Sales revenue from Health food business segment	$$2,600,000
Cost of Goods sold	($1,700,000)
Other operating expenses	($1,200,000)
Operating loss	($300,000)
Loss on disposal of Health food business segment	($500,000)
Loss from discontinued operations (before taxes)	($800,000)
Add: Income tax benefit @40% [$800,000 x 40%]	$320,000
Loss from discontinued operations (after taxes)	$480,000