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135 c gainsalepricebookvalue 1taxrate

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Unformatted text preview: ,750 113,750 $ 123,500 E13–7 a. Mallory Services Income Statement For the Year Ended December 31, 2012 Income from continuing operations (before taxes) $ 950,000 Income tax expense 332,500a Income from continuing operations $ 617,500 Discontinued operations: Income earned by discontinued segment (net of tax expense of $ 7,800b Gain on disposal $4,200) of discontinued segment (net of tax expense of $13,300) 24,700c Discontinued operations 32,500 Net income $ 650,000 _________________ a $332,500 = $950,000 35% b Income = Revenues – Expenses (1 – tax rate) $7,800 = ($35,000 – $23,000 (1– 35%) c Gain = Sale price – Book value (1– tax rate) $24,700 = [$105,000 – ($93,000 – $26,000)] (1 – 35%) Earnings persistence reflects the extent to which a particular dollar of earnings can be expected to continue in the future. A user would expect the income from continuing operations of $617,500 to continue in the future, but interpret the income and gain from the discontinued division to reflect a one­time increase in earnings that is not expected to be realized in the future. E13–7 Concluded b. Mallory Services Income Statement For the Year Ended December 31, 2012 Income from continuing operations (before taxes) 962,000a Income tax expense 336,700b Net income 625,300 $ $ ______________________________ a Income from continuing operations = Income excluding clerical division + Activities of clerical division $962,000 = $950,000 + ($35,000 – $23,000) b $336,700 = $962,000 35% A user would expect the entire amount of net income to persist in the future. No items are separated out as one­time unusual and/or infrequent. c. Sharon Sowers faces a number of trade­offs as she decides whether to complete the sale in 2012 or 2013. First, income is already positive and strong in 2012. The gain from the sale increases net income by only $24,700. If Mallory Services expects a weaker 2013, it may be more beneficial to the income statement to wait until 2013 in order to offset poorer performance. Also, by selling in 2012, recurring income from operations isn’t as large as it could be. Users would interpret the financial statements as $617,500 persisting into the future versus $625,300 if the division isn’t sold until 2013. On the other hand, Sharon may receive bonuses on net income and may prefer to receive the bonus now or may even need the gain caused by the disposal to increase net income to some minimum amount for a bonus. Also Mallory Services may face debt convenants that need to be covered by a larger amount of income. Finally, Susan may be able to use the cash from the sale to invest in alternative projects that immediately earn a higher return than produced by the clerical division. E13–8 a. Carmich Industries Income Statement For the Year Ended December 31, 2012 Income from continuing operations (before taxes) $ 1,930,000 Income tax expense 675,500a Income from continuing operations $ 1,254,500 Discontinued operations: Income earned by discontinued segment (net of tax expense...
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