Chapter 4, Problem 4.2P

Discontinued operations

• LO4–4

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2018 and 2017:

	2018	2017
Sales	$15,000,000	$9,600,000
Cost of goods sold	9,200,000	6,000,000
Gross profit	5,800,000	3,600,000
Operating expenses	3,200,000	2,600,000
Operating income	2,600,000	1,000,000
Gain on sale of division	600,000	—
	3,200,000	1,000,000
Income tax expense	1,280,000	400,000
Net income	$1,920,000	$ 600,000

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 $5,000,000. 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:

2018	$400,000
2017	$300,000

Assume an income tax rate of 40 percent.

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, 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 $5,000,000. What would be the amount presented for discontinued operations?

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 $3,900,000. What would be the amount presented for discontinued operations?