Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2018 and 2017: Sales Cost of goods sold Gross profit Operating expenses Operating income Gain on sale of division 2018 2017 $ 16,600,000 $11,200,000 10,000,000 6,800,000 6,600,000 4,400,000 3,840,000 3,240,000 2,760,000 1,160,000 760,000 3,520,000 1,160,000 1,056,000 348,000 $ 2,464,000 $ 812,000 Income tax expense Net income 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 $5,480,000. Book value of the division's assets was $4,720,000. The division's contribution to Jackson's operating income before-tax for each year was as follows: 2018 $480,000 2017 $380,000 Assume an income tax rate of 30%. 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, 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 $5,480,000. 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 $4,060,000. Prepare revised income statements according to generally accepted accounting principles, beginning with income from continuing operations before income taxes. Ignore EPS disclosures.

Answer 1

1)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2018	2017
Income from continuing operations before  income taxes (1)	$                3,240,000.00	$                                   1,540,000.00
Income tax expense  @ 30%	$                 -972,000.00	$                                     -462,000.00
Income from continuing operations	$                2,268,000.00	$                                   1,078,000.00
Discontinued operations:
Income (loss) from operations of discontinued  component (2)	$                   280,000.00	$                                     -380,000.00
Income tax benefit (expense)	$                   -84,000.00	$                                      114,000.00
Income (loss) on discontinued operations	$                   196,000.00	$                                     -266,000.00
Net Income	$                2,464,000.00	$                                      812,000.00
1) Income from continuing operations before Income Taxes
	2018	2017
Unadjusted Income	$                2,760,000.00	$                                   1,160,000.00
Add: Loss from discontinued operations	$                   480,000.00	$                                      380,000.00
Adjusted	$                3,240,000.00	$                                   1,540,000.00
2) Income from discontinued operations:
Loss from operations	$                 -480,000.00	$                                     -380,000.00
Gain on disposal (5,480,000 - 4,720,000)	$                   760,000.00
Total	$                   280,000.00	$                                     -380,000.00
2)
JACKSON HOLDING COMPANY
Comparative Income Statements
For the Years Ended December 31
	2018	2017
Income from continuing operations before  income taxes (1)	$                3,240,000.00	$                                   1,540,000.00
Income tax expense  @ 30%	$                 -972,000.00	$                                     -462,000.00
Income from continuing operations	$                2,268,000.00	$                                   1,078,000.00
Discontinued operations:
Income (loss) from operations of discontinued  component	$                 -480,000.00	$                                     -380,000.00
Income tax benefit (expense)	$                   144,000.00	$                                      114,000.00
Income (loss) on discontinued operations	$                 -336,000.00	$                                     -266,000.00
Net Income	$                1,932,000.00	$                                      812,000.00
The 2018 income from discontinued operations would include only the loss from operations   of   $480,000.   Since   no   impairment   loss   is   indicated    (5,480,000 - 4,720,000) =  $760,000  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
	2018	2017
Income from continuing operations before  income taxes (1)	$                3,240,000.00	$                                   1,540,000.00
Income tax expense  @ 30%	$                 -972,000.00	$                                     -462,000.00
Income from continuing operations	$                2,268,000.00	$                                   1,078,000.00
Discontinued operations:
Income (loss) from operations of discontinued  component	$                 -280,000.00	$                                     -380,000.00
Income tax benefit (expense)	$                     84,000.00	$                                      114,000.00
Income (loss) on discontinued operations	$                 -196,000.00	$                                     -266,000.00
Net Income	$                2,072,000.00	$                                      812,000.00
The  2018  income  from  discontinued  operations  would include  the  loss  from  operations  of  $480,000  as  well  as  an  impairment  loss  of  $760,000  ($5,480,000  book  value of assets less $4,720,000 fair value).