Discontinued Operations

The following condensed income statements of the Jackson Holding Company are presented for the two years ended December 31, 2011 and 2010:

                                                                                                               

                                                                                    2011                                                   2010

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, 2011 Jackson entered into a tentative agreement to sell the assets of one of its divisions. The division compromises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. The division was sold on December 31, 2011 for $5,000,000. Book Value of the divisions assets was $4,400,000. The divisions contribution to Jacksons operating income before tax for each year was as follows:

2011         $400,000 loss

2012         $300,000 loss

Assume an income tax rate of 40%.

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 12/31/11 the division had not yet been sold but was considered held for sale. The fair value of the divisions assets on 12/31/11 was $5,000,000. How would the presentation of discontinued operations be different from the answer to #1 above?

3.)    Assume that by 12/31/11, the division had not yet been sold but was considered held for sale. The fair value of the divisions assets on 12/31/11 was $3,900,000. How would the presentation of discontinued operations be different  from the answer to #1 above?

Problem 2

Prepare Schembri’s combined statement of income and comprehensive income for 2011, including basic earnings per share disclosures. One million shares of common stock were outstanding at the beginning of the year and an additional 400,000 shares were issued on July 1st, 2011.

Duke Company records show the following account balances at December 31st, 2011:

              Sales                                                   $15,000,000

                Cost of Goods sold                               $ 9,000,000

            General and admin expenses     $ 1,000,000

            Selling expenses                               $ 500,000

            Interest expense                                $700,000

Income tax expense has not yet been determined. The following events also occurred during 2011. All transactions are material in amount.

1.)    $300,000 in restructuring costs were incurred in connection with plant closings.

2.)    The company operates a factory in South America. During the year, the foreign government took over the factory and paid Duke $1,000,000, with was one-fourth of the book value of the assets involved.

3.)    Inventory costing $400,000 was written off as obsolete.  Material losses of this type are not considered to be unusual.

4.)    It was discovered that depreciation expense for 2010 was understated by $50,000 due to a mathematical error.

5.)    The company experienced a foreign currency translation adjustment loss of $200,000 and had unrealized gains on securities available for sale of $180,000.

Prepare a combined multiple-step statement of income and comprehensive income for 2011. The company’s effective tax rate on all items affecting comprehensive income is 40%. Each component of other comprehensive income should be displayed net of tax. Ignore EPS disclosures.