has It is December 2018, and Sharon Sowers, the CEO of Mallory Services, has dec

ID: 2530632 • Letter: H

Question

has It is December 2018, and Sharon Sowers, the CEO of Mallory Services, has decided to sell the clerical division. She has received an offer for $105,000 but is undecided about whether she wishes to complete the sale in 2018 or 2019. She is currently evaluating the effects of the sale on 2018 reported net income. Income from continuing operations for 2018 is estimated to be $950,000 (excluding the activities of the clerical division), and information about the clerical division is provided as follows. The company's tax rate is 35 percent. sale in 0 si r has rec December 2018 Year Ended 2018 Sales Operating expenses 35,000 Assets $93,000 26,000 23,000 Liabilities a. Prepare the 2018 income statement, beginning with net income from continuing operations, assuming that Sharon accepts the offer, and explain how a user might interpret the items on the income statement in terms of earnings persistence.

Explanation / Answer

Since the offer is accepted, the normal selling activity of clerical division can’t be done. Therefore, sales and operating activity should not be considered here; only the balance sheet items (assets and liabilities) and offer price should be required for income calculation.

Heads and particulars

$ amount

Net income from continuing operation

950,000

Sale of clerical division:

Offer price

105,000

Add: Liabilities

26,000

131,000

Less: Assets

93,000

Income before tax

38,000

Less: Tax at 35%

13,300

Net income out of sale of division

24,700

Total net income

974,700