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The unaudited income statement of XYZ corp are reproduced below. Year 8 Year 7 S

ID: 2443655 • Letter: T

Question

The unaudited income statement of XYZ corp are reproduced below.

Year 8 Year 7
Sales - $1,100 $900
Costs and Expenses - $990 $860
Loss on Asset disposal - $10
Income before Taxes - $100 $40
Tax Expense - $50 $20
Net Income $50 $20

On 8/15/X8 the company decided to discontinue its manufacturing division. The business was sold on 12/31/X8 at book value except for a building with a book value of $25 that was sold for $15. operation of the division were:

Sales Income
Year7 300 8
1/1/X8 to 8/15/X8 250 -3
8/16/X8 to 12/31/X8 75 -1

Required
correct the year 7 and year 8 income statement to reflect the proper reporting of discontinued operations

Explanation / Answer

Problem 6-1 (30 minutes)

The income statements of Disposo Corp. should be shown as follows

                                                                                                         Year 8     Year 7

Sales.....................................................................................           $775          $600

Costs and expenses .......................................................           (657)        (576)

Pretax income....................................................................           118              24

Tax expense.......................................................................              (59)            (12)

Income from continuing operations ...........................           $ 59          $ 12

Discontinued operations:

Operations (net of tax) [a].........................................                 (3)               8

Disposal (net of $6 tax) [b]........................................                 (6)                                 

Net Income..........................................................................           $ 50          $ 20

        [a] Represents net income (loss) from operations for Year 7 and for Year 8 until August 15.

        [b] Represents:

Loss from operations August 15 to December 31........................             $ (1)

Loss on sale of assets (after $5 tax)...............................................               (5)

Total...................................................................................................             $ (6)

The $10 loss and related tax benefit of $5 would still be recorded (anticipated) at December 31, Year 8 (the asset would be reduced by $10 to market value).