Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2021 and 2020: Sales revenue Cost of goods sold Gross profit Operating expenses Operating income Gain on sale of division 2021 2020 $ 16,700,000 $11,300,000 10,050,0006,850,000 6,650,000 4,450,000 3,880,000 3,280,000 2,770,000 1,170,000 770,000 3,540,000 1,170,000 885,000 292,500 $ 2,655,000 $ 877,500 Income tax expense Net income 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 $5,510,000. Book value of the division's assets was $4,740,000. The division's contribution to Jackson's operating income before-tax for each year was as follows: 2021 2020 $ 485,000 $385,000 Assume an income tax rate of 25%. Required: (In each case, net any gain or loss on sale of division with annual income or loss from the division and show the tax effect on a separate line.) 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 $5,510,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures 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 $4,070,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

How do you find the income (loss) from operations of discontinued component for requirement #3?

Answer 1

Solution:

JACKSON HOLDING COMPANY
Comparative Income Statements (in part)
For the Years Ended December 31
	2021	2020
Income from continuing operations before income taxes	$ 2,285,000	$ 785,000
Income tax benefit (expense)	$ (571,250)	$ (196,250)
Income from continuing operations	$ 1,713,750	$ 588,750
Discontinued operations gain (loss):
Income (loss) from operations of discounted components	$ 0	$ 0
Income tax benefit (expense)	$ 0	$ 0
Income from discontinued operations	$ 0	$ 0
Net Income	$ 1,713,750	$ 588,750

                It is clearly mentioned in the sum that the division had not yet been sold but was only considered held for sale. According to generally accepted accounting principles, Income can’t be recorded in Income Statement unless sales have happened. So, the income generated by company through sale of division would be $0.