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In: Accounting

On August 1, 20x1, Rocket Retailers adopted a plan to discontinue its children's clothing division


On August 1, 20x1, Rocket Retailers adopted a plan to discontinue its children's clothing division, which qualifies as a component of the business according to GAAP. The disposal of the division was expected to be concluded by June 30, 20x2. On December 31, 20x1, Rocket's fiscal year-end, the following information relative to the discontinued operation was accumulated: 

Operating Income (pre-tax) Jan 1, 20x1 - Dec 31, 20x1$438,000
Estimated Operating Income (pre-tax) Jan 1, 20x2 - June 30, 20x2180,000
Net Book Value of the Component2,750,000
Fair Value of the Component2,500,000
Estimated Disposal Costs100,000
Income Tax Rate21%



Rocket finalized the sale of the component on June 30, 20x2 for cash proceeds of $2,600,000. Actual operating income of the discontinued component from Jan 1 - Jun 30, 20x2, was $120,000. (This $120,000 is NOT included in the $1,500,000 Income Before Taxes listed below.) Use this information and the Additional Data presented below to prepare a partial Income Statement for the year ended December 31, 20x1 beginning with Income from Continuing Operations. Include Earnings Per Share disclosures. 

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b.  Determine the Total Gain/Loss from Discontinued Operations (net) $_____________________

c. Determine Net Income  $_____________________

d. Determine EPS – Continuing Operations                                             $_____________________

e.  Determine EPS – Discontinued Operations                                         $_____________________

f.  Determine EPS – Net Income                                                                $_____________________


Solutions

Expert Solution

b.

Discontinuing operations
Operating income - Jan'11 to Dec'11 438000
Less: Tax @21% -91980
Net income - Jan'11 to Dec'11 346020
Operating income - Jan'x1 to Jun 20x2 120000
Less: Estimated Disposal costs -100000
Net income - Jan'x1 to Jun 20x2 20000
Sale consideration for operations 2600000
Less: Net Book value -2750000
-150000
Add: Retained Earnings
Net income - Jan'x1 to Jun 20x2 20000
Net (Loss) on Discontinuing operations -130000

c.

Income from continuing operations 1500000
Less: Tax @ 21% -315000
Net Income from continuing operations 1185000

Total Net Income = Continuing + Discontinuing operations = 1185000-130000 = 1,055,000

d.

Net Income from continuing operations 1185000
Less: Preferred dividend (10000*100*5%) -50000
Net income available for common stakeholders..(i) 1135000
Common stock outstanding…(ii) 400000
EPS from continuing operations…..(i)/(ii)           2.84

e.

Net (Loss) on Discontinuing operations -130000
Less: Preferred dividend (10000*100*5%) 0 Since loss is incurred, no preference dividend shall be provided for
Net income available for common stakeholders..(i) -130000
Common stock outstanding…(ii) 400000
EPS from continuing operations…..(i)/(ii)         -0.33

f.

Net Income from continuing operations 1185000
Net (Loss) on Discontinuing operations -130000
Net Income 1055000
Less: Preferred dividend (10000*100*5%) -50000
Net income available for common stakeholders..(i) 1005000
Common stock outstanding…(ii) 400000
EPS …..(i)/(ii)           2.51

ekkarill92 answered 2 years ago
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