Question

On October 5, 2017, Diamond in the Blue Spruce Group Inc.’s board of directors decided to dispose of the Blue Division. A formal plan was approved. Diamond derives approximately 80% of its income from its human resources management practice. The Blue Division gets contracts to perform human resources management on an outsourced basis. The board decided to dispose of the division because of unfavourable operating results.

Net income for Diamond was $94,400 for the fiscal year ended December 31, 2017 (after a charge for tax at 30% and after a writedown for the Blue assets). Income from operations of the Blue Division accounted for $4,100 (after tax) of this amount.

Because of the unfavourable results and the extreme competition, the board believes that it cannot sell the business intact. Its final decision is to auction off the office equipment. The equipment is the division’s only asset and has a carrying value of $25,000 at October 5, 2017. The board believes that proceeds from the sale will be approximately $5,000 after the auction expenses. Currently, the estimated fair value of the equipment is $8,000. The Blue Division qualifies for treatment as a discontinued operation. Diamond prepares financial statements in accordance with ASPE.

(a)

Prepare a partial income statement for Diamond in the Blue Spruce Group. The income statement should begin with income from continuing operations before income tax. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Net income for the fiscal year ended December 31, 2017 (after tax) = $94,400

Net Income Before Tax (94400 / 0.7) = $134,857 (Approx)
Add: Asset Written Off
(25000 - 5000) $ 20,000
Total Income $ 154,857

Income from operations of the Blue Division (After Tax) = $4,100
Income from operations of the Blue Division (Before Tax) = $4100 / 0.7 = $5857 (approx)

So, Revenue from continuing operations = ( $ 154857 - $5857 ) = $149000

Income Statement

Particulars	Amount
Revenue from continuing operations	$149,000
Less: Asset written off	$20,000
Earning Before Tax	$129,000
Less: Tax @30%	$38700
Earning After Tax	$90300
Add: Revenue from discontinued operation	$4,100
Net Income	$94400