Question

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2021 and 2020:

2021 2020 Sales revenue $ 15,000,000 $ 9,600,000 9,200,000 6,000,000 5,800,000 3,600,000 Cost of goods sold Gross profit Operating expenses Operating income Gain on sale of division 3,200,000 2,600,000 2,600,000 1,000,000 600,000 3,200,000 1,000,000 800,000 250,000 Income tax expense Net income $ 2,400,000 $ 750,000 On October 15, 2021, 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, 2021, for $5,000,000. Book value of the division's assets was $4,400,000. The division's contribution to Jackson's operating income before-tax for each year was as follows: 2021 $400,000 2020 $300,000 Assume an income tax rate of 25%.

Required:

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, 2021, 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 $5,000,000. what would be the amount presented for discountinued operations?

3. Assume that by December 31, 2021, 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 $3,900,000. what would be the amount presented for discontinued operations?

Answer 1

Answer 1.

	Revised Income Statement
	Particulars	2021	2020
	Income from Continuing Operation	2200000	700000
	Income from Discontinuing Operation	400000	300000
	Operating Income	2600000	1000000
	Other Income
	Gain from sale of discontinued operation	600000	0
	Total Income	3200000	1000000
	Income Tax Exp	800000	250000
	Net Income	2400000	750000

Answer 2.

Book Value of Assets = 4,400,000

Fair value of Assts = 5,000,000

Assets will be carried at book value. There is no impairment loss

Answer 3

Book Value of Assets = 4,400,000

Fair value of Assts = 3,900,000

Assets will be carried at book value or fair value, whichever is lower. There is impairment loss to assets as the carry value is higher than recoverable value. Impairment Loss = 500,000