The following condensed income statements of the Jackson Holding 2018 and 2017 C

Question

The following condensed income statements of the Jackson Holding 2018 and 2017 Company are presented for the two years ended December 31, Sales Cost of goods sold Gross profit Operating expenses Operating income Gain on sale of division $16, 809,e00 $11,40e,e0e 10,180,00 6,989,800 6,709,880 4,500,000 3,920,e00 3,320,809 2,780,000 1,180,980 789,989 Income tax expense Net income 3,560,880 1,180,009 1,424,000 472,000 2,136,000 788,000 On October 15. 2018, 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, 2018, 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 2018 $498,000 2017 $390,000 Assume an income tax rate of 40%. Required: (In each case, net any gain or loss on sale of division with annual income or loss from the division and show the tox 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, 2018, 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, 2018, 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.

Explanation / Answer

Part 1 - Revised Income statements according to generally accepted accounting principles.

Jackson Holdings Company

Comprehensive Income Statement

For the Year Ended December 31

($1308000)

($2780000 + $490000) * 40%

($628000)

($1180000 + $390000) * 40%

($116000)

($780000-$490000)*40%

$156000

($390000 * 40%)

Part 2 - Income statement if Division had not been sold but considered held for sale and fair value of division asset is $5540000.

Note : Anticipated gain on disposal is not recognises in the books of accounts until it is realized. Hence Anticipated gain of $780000 will not be considered in it.

$196000

($490000 * 40%)

$156000

($390000 * 40%)

Part 3 - Income statement if division had not been sold but was considered held for sale and fair value of division assets is $4080000

Note : Since books value is more than the fair value of division assets hence anticipated loss would be recognised as per 'convention of conservatism'.

Loss = ($4080000 - $4760000) = $680000

Discontinued operations gain/(loss)

Loss from Discontinued component Operations

($490000)

($390000)

$468000

($680000+$490000)*40%

$156000

($390000*40%)

$708000

Particulars Year 2018 Year 2017 Income from continous operations before Income taxes $2780000 $1180000 Income from Discontinued component operations $490000 $390000 Income Tax expenses

($1308000)

($2780000 + $490000) * 40%

($628000)

($1180000 + $390000) * 40%

Income From continuing operations (A) $1962000 $942000 Discontinued operations gain/(loss) Loss from discontinued component operations ($490000) ($390000) Income from sale of division $780000 Income tax benefit/(expense)

($116000)

($780000-$490000)*40%

$156000

($390000 * 40%)

Gain/(loss) from discontinued operations (B) $174000 ($234000) Net Income (A+B) $2136000 $708000

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