Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2021 and 2020:

		2021			2020
Sales revenue	$	16,800,000		$	11,400,000
Cost of goods sold		10,100,000			6,900,000
Gross profit		6,700,000			4,500,000
Operating expenses		3,920,000			3,320,000
Operating income		2,780,000			1,180,000
Gain on sale of division		780,000			—
		3,560,000			1,180,000
Income tax expense		890,000			295,000
Net income	$	2,670,000		$	885,000

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 $5,540,000. Book value of the division’s assets was $4,760,000. The division’s contribution to Jackson’s operating income before-tax for each year was as follows:

2021	$490,000
2020	$390,000

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 $5,540,000. 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 $4,080,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures

	JACKSON HOLDING COMPANY Comparative Income Statements (in part) For the Years Ended December 31 2021 2020 Income from continuing operations before income taxes Income from continuing operations 0 0 Discontinued operations gain (loss): Income from discontinued operations 0 0 Net income $0 $0

	JACKSON HOLDING COMPANY Comparative Income Statements (in part) For the Years Ended December 31 2021 2020 Income from continuing operations before income taxes Income from continuing operations 0 0 Discontinued operations gain (loss): Income from discontinued operations 0 0 Net income $0 $0

	JACKSON HOLDING COMPANY Comparative Income Statements (in part) For the Years Ended December 31 2021 2020 Income from continuing operations before income taxes Income from continuing operations 0 0 Discontinued operations gain (loss): Income from discontinued operations 0 0 Net income $0 $0

Answer 1

1)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021	2020
Income from continuing operations before  income taxes (1)	$                  3,270,000.00	$                  1,570,000.00
Income tax expense  @ 25%	$                   -817,500.00	$                    -392,500.00
Income from continuing operations	$                  2,452,500.00	$                  1,177,500.00
Discontinued operations:
Income (loss) from operations of discontinued  component (2)	$                     290,000.00	$                    -390,000.00
Income tax benefit (expense)	$                     -72,500.00	$                       97,500.00
Income (loss) on discontinued operations	$                     217,500.00	$                    -292,500.00
Net Income	$                  2,670,000.00	$                     885,000.00
1) Income from continuing operations before Income Taxes
	2018	2017
Unadjusted Income	$                  2,780,000.00	$                  1,180,000.00
Add: Loss from discontinued operations	$                     490,000.00	$                     390,000.00
Adjusted	$                  3,270,000.00	$                  1,570,000.00
2) Income from discontinued operations:
Loss from operations	$                   -490,000.00	$                    -390,000.00
Gain on disposal (5,540,000 - 4,760,000)	$                     780,000.00
Total	$                     290,000.00	$                    -390,000.00
2)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021	2020
Income from continuing operations before  income taxes (1)	$                  3,270,000.00	$                  1,570,000.00
Income tax expense  @ 25%	$                   -817,500.00	$                    -392,500.00
Income from continuing operations	$                  2,452,500.00	$                  1,177,500.00
Discontinued operations:
Income (loss) from operations of discontinued  component	$                   -490,000.00	$                    -390,000.00
Income tax benefit (expense)	$                     122,500.00	$                       97,500.00
Income (loss) on discontinued operations	$                   -367,500.00	$                    -292,500.00
Net Income	$                  2,085,000.00	$                     885,000.00
The 2021 income from discontinued operations would include only the loss from operations   of   $490,000.   Since   no   impairment   loss   is   indicated    (5,540,000 - 4,760,000) =  $780,000  anticipated  gain),  none  is  included.  The anticipated  gain  on  disposal is not recognized until it is realized, presumably in the following year.
3)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2021	2020
Income from continuing operations before  income taxes (1)	$                  3,270,000.00	$                  1,570,000.00
Income tax expense  @ 25%	$                   -817,500.00	$                    -392,500.00
Income from continuing operations	$                  2,452,500.00	$                  1,177,500.00
Discontinued operations:
Income (loss) from operations of discontinued  component	$                   -970,000.00	$                    -390,000.00
Income tax benefit (expense)	$                     242,500.00	$                       97,500.00
Income (loss) on discontinued operations	$                   -727,500.00	$                    -292,500.00
Net Income	$                  1,725,000.00	$                     885,000.00
The  2021  income  from  discontinued  operations  would include  the  loss  from  operations  of  $490,000  as  well  as  an  impairment  loss  of  $1,460,000  ($5,540,000  book  value of assets less $4,080,000 fair value).