Question

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 8 PARTS:

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, 20x2

180,000

Net Book Value of the Component

  2,750,000

Fair Value of the Component

2,500,000

Estimated Disposal Costs

100,000

Income Tax Rate

21%

a. Because the sale was not complete by December 31, 20x1, Rocket had to test the component for impairment.  Determine the Impairment Loss (net of tax), that Rocket would report in their 20x1 footnotes (if any):                    $___________________

*If an impairment loss is indicated, just record your answer as a positive number. Do not use commas or dollar signs. Example: If you determine there is an Impairment Loss of 100,000 (pretax), enter your answer as 79000. Remember, your answer should be reported after tax of 21% has been deducted.

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b. In its Income Statement for the year ended December 31, 20x1, Rocket would report a total Gain/Loss on Discontinued Operations (net of tax) of:  $___________________

*Do not use dollar signs or commas when recording your answer. If your answer is a Loss, record your answer using () parenthesis. The "total" gain/loss should include both the Income/loss from the discontinued operation + the impairment loss (if any), and reported after tax.

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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.

Additional Data:

Income Before Taxes (’x2)                                               $1,500,000

   Income Tax Rate(’x2)                                                                  21%

5% Preferred Stock ($100 Par, 10,000 shares issued)

Common Stock ($1 par, 500,000 shares issued, 400,000 outstanding)

Partial Income Statement

Rocket Corporation

For the Year Ended December 31, 20x2

Income from Continuing Operations                                      $    Blank 1

Total Gain/Loss from Discontinued Operations (net of tax)   $    Blank 2

Net Income                                                                            $    Blank 3

E.P.S.

Continuing Operations                   $    Blank 4

Discontinued Operations               $    Blank 5

Net Income                                    $    Blank 6

c. Determine Income from Continuing Operations:                             $_____________________

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

*If your answer is a Loss, enter your answer using () parenthesis. Do not use $ signs or commas in recording your answer.

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e.  Determine Net Income                                                                                $_____________________

*Do not use dollar signs or commas when recording your answer.

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f. Determine EPS – Continuing Operations                                             $_____________________

*round your answer to the nearest full cent. Do not include dollar signs when recording your answer. Example: if you determine EPS from Continuing Operations to be $1.8743, record your answer as 1.87.

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g.  Determine EPS – Discontinued Operations                                         $_____________________

*round your answer to the nearest full cent. Do not use a dollar sign when recording your answer. If you determined there was a Loss on Discontinued Operations, enter your answer for EPS using () parenthesis

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h.  Determine EPS – Net Income                                                                                      $_____________________

*round your answer to the nearest full cent. Do not use a dollar sign to record your answer.

Answer 1

Page No - 1 A b] Discendinging Operations : Cperating income - Jan'll to Dec'll Less: Tax @alil. .: Net Incorue - Jan'll to DEC'U 438000 91980 346020 120000 10000 Operating Income - Jan'xl to Jan 2012 Less: Estimated Disposal costs | Net å rome-Jan'x1 to Jun 20x2 20000 26000 Sale consideration for Operations I Less : Net Book value 2750000 (150000 And Retained earnings met income-Jank to Jun 2012 met (less) an Driscontinuing Cperations 20000 (130000

Page - 2 . [C Income from Continuing Operations less : Tax @all. Mel pucome from Continusinne Oprvalisce 15400o 395000 11850g . Total Not Income acronlinsing & Discontinuing Operations . 1185000 - 130000 : 1055000 | Scooo Met Income from contienesing Operations 1125000 less : preferred dividend (1000g 1,851) Het arcome quailable for common Slabbeldoos.cis 13 cm Common slock cutstanding ...in EPS from continuing -- listi 2.84

Page - 3 tej Net Closs on Discontinuing Operations (136000) Less: Preferred dividend 10000*100*5.1 o Since the loss is incorred, no preferencer I dividend shall be added) Net Prome available for common (430000) Shakeholders ... Common stock outstanding... | 400ooo! EPS from continuing Operations... isrif (0.33) Net Income from continuing Operations 1185000 Nel [loss] on Discontinuing Operations (130000) Net Income 2055000 less: preferred dividend (1000x100x st.) 50000 Net Income available for common stakeholders cosm common stock outstanding ...in EPS --Cyliss 400000 2. 51