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The distinction between operating and nonoperating activities relate to the:
Primary activities of the business.
   
Learning Objective 04-01 Discuss the importance of income from continuing operations and describe its components.
[The following information applies to the questions displayed below.]
   
The components of income from continuing operations are revenues, expenses (including income taxes), gains, and losses,
excluding those related to discontinued operations. Companies often distinguish between operating and nonoperating income
within continuing operations.
Income statement formats
   
Knowledge Check 01
Which of the following statements are correct regarding the two income statement formats? (Select all that apply.)
Check All That Apply
 
No specific standard dictates the format of the income statement.
Companies usually report income tax expense in a separate line in the income statement regardless of the format used.
The multiple-step format provides information that might be useful in analyzing trends.
 
Explanation
Although the items are grouped differently, therefore subtracted in a specific order,
once net income is reached, it is the same under both presentation formats.
   
Which of the following is likely to be part of temporary earnings?
Loss on the sale of investments.
  Merrell Corp. discontinued a component of its business on October 17. For the year,
the discontinued component had operating income of $4,000,000.
At the time of the sale, the assets of the discontinued component had book values of $10,000,000 and were sold for $12,000,000.
Income from operations of the continuing parts of the company were $14,000,000 for the year. Assuming a 40% tax rate,
what amount would Merrell report as income from discontinued operations?
 
$3,600,000
 
Explanation
Knowledge Check 01

Operating income from Jan. 1 to Oct. 17	$	4,000,000
Gain on disposal		2,000,000
Income from operations of discontinued component		6,000,000
Less: Tax effect (40% × $6,000,000)		2,400,000
Income from discontinued operations	$	3,600,000

 
Learning Objective 04-05 Discuss additional reporting issues related to accounting changes, error corrections, and earnings per share (EPS).

Accounting changes include changes in principle, changes in estimate, or changes in reporting entity.
Their effects on the current period and prior period financial statements are reported using various approaches—
retrospective, modified retrospective, and prospective. Error corrections are made by restating prior period financial statements.
Any correction to retained earnings is made with an adjustment to the beginning balance in the current period. Earnings per share
(EPS) is the amount of income achieved during a period expressed per share of common stock outstanding.
EPS must be disclosed for income from continuing operations and for discontinued operations.
 
Taylor Company purchased a machine and plans to depreciate it over its estimated useful life of 10 years.
Over the next four years, the machine was used more extensively than originally estimated,
so Taylor revised the useful life estimate to a total of 8 years. This change should be accounted for as a:
Change in accounting estimate, with a prospective approach.
   
The correction of an error in the financial statement of a prior period should be reported:
As an adjustment to the beginning balance of retained earnings in the statement of shareholders’ equity.
   
Alpha Company has sales revenue of $5,000,000, cost of goods sold of $2,000,000, and net income of $750,000.
For the last three years, the company has 1,000,000 shares of common stock authorized and 200,000 shares of common stock
issued and outstanding. The company does not have any preferred stock. What is basic EPS for Alpha Company?
 

 
 
Explanation
Basic EPS is calculated as net income minus preferred dividends, divided by the weighted-average number of common stock shares outstanding.
Net income is $750,000, there are no preferred dividends, and there are 200,000 shares of common stock outstanding throughout the year.
EPS = $750,000 ÷ 200,000 shares = $3.75 per share
   
Which of the following activities affects operating cash inflows?
Selling 100 units of inventory for cash. Which of the following is an investing activity on the statement of cash flows?
 
Sale of the old factory after the company moves into a new factory. Fortuna Company is preparing its statement of cash flows. Cash disbursements during the year included:
 

Payment for a new stamping machine	$	200,000
Payment of dividends to stockholders		100,000
Payment to acquire 100 shares of Lola Corp.		40,000

 
What are Fortuna’s total cash outflows for financing activities?
 
Which of the following terms are used to describe an income statement?
(Select all that apply)
 
Statement of Operations
Statement of Changes in Financial Position
Statement of Business Activities
Statement of Earnings Which of the following financial statement elements are measured and reported as a result of providing goods and services to customers?
(Select all that apply.)
 
Expenses
Losses
Revenues
Gains  
Which of the following items are included in calculating operating income? (Select all that apply.)
 
revenues related to primary revenue-generating activities
expenses related to primary revenue-generating activities Income tax expense is reported in what way on the income statement?
Multiple choice question.
 
As part of other expenses.
As a separate line item.
As part of general expenses. The two approaches most commonly used to prepare an income statement are
 
operating and nonoperating
single-step and multiple-step
current and noncurrent
direct and indirect Which of the following terms is also used as a heading for an income statement?
 
Statement of Performance Indicators
Statement of Business Activities
Statement of Operations
Statement of Cash Flows In looking at earnings quality, analysts try to separate a company's earnings effects from its earnings.
(Enter only one word per blank.)
 
Temporary, permanent Match each company to the type of revenue it receives.
 
ABC Tax Advisors - Service Revenue
Best Buy - Sales revenue The evidence that a financial statement user or analyst might use as evidence to suggest that earnings have been smoothed is
 
earnings may not increase more than 10% without a penalty.
income is averaged with historical numbers.
earnings have a steady stream over time.
income is deferred until contractual relations are negotiated. Which of the following items are reported as components of operating income for most manufacturing and merchandising companies?
(Select all that apply.)
 
revenues
selling expenses
interest expense
administrative expenses Costs that are planned and controlled by management that materially change the scope of the business undertaken or the manager
in which the business is conducted are called _________________ costs
 
restructuring Where on the income statement is income tax expense reported?
Multiple choice question.
 
In extraordinary gains and losses.
In other comprehensive income.
In a separate line.
In other expenses. Gains and losses from the sale of investments can affect earnings quality because
Multiple choice question.
 
they are netted against cost of goods sold.
they are often nonrecurring.
the gains were included in revenues.
they are often recurring.
   
The two approaches for preparing an income statement are the __________ step and _________________ step approaches.
 
Single
Multi
   
 
Non-GAAP earnings are calculated
Multiple choice question.
 
based on assets that are expected to be converted to cash in the next operating cycle.
based on historical cost assumptions.
based on statistical analysis of time series data.
based on management's assumptions of permanent earnings.
   
Analyzing earnings quality requires an analyst to
Multiple choice question.
 
separate a company's temporary and permanent earnings.
score a company based on its historical earnings.
combine all earnings for analysis.
determine whether the auditor was correct in calculating earnings.
   
If discontinued operations have a _____ effect on the income statement, they must be reported separately.
Multiple choice question.
 
negative
positive
minimal
material
   
Income smoothing describes the concept that.
 
managers manipulate the pattern of income to not vary much between years.
income is averaged over a 10-year moving average.
income is not reported until approved by the board of directors.
   
A discontinued operation is reported when a ___________________ of an entity either (a) has been disposed of or (b) is classified as held for sale.
(Enter one word per blank)
 
component
   
_____ costs include costs associated with shutdown or relocation of facilities.
Multiple choice question.
 
Refunding
Restructuring
Moving
Closing
   
If a component of the business qualifies for discontinued operations treatment, which of the following statements are true?
(Select all that apply.)
 
Revenue from the discontinued operations is listed immediately below revenue in the operating section of the income statement.
The tax expense effect is removed from continuing operations.
All related revenues, expenses, gains, and losses must be removed from continuing operations.
Revenues and expenses are reported in continuing operations, but gains and losses are reported as discontinued operations.
   
Nonoperating items that are not expected to continue into the future are considered a ______ component of earnings
and should be __________ when forecasting future performance.
 
temporary; included
permanent; included
temporary; excluded
permanent; excluded
   
Which of the following is a category of accounting change?
 
Liability classification
Reporting entity
Reporting class
Entity classification
   
Management's assessment of permanent earnings are referred to as what?
 
Income from continuing operations
Non-GAAP earnings
Perpetual income
Net income
   
When an immaterial error is discovered in the same year it is made before the financial statements are issued,
what is the appropriate course of action?
 
Reverse the erroneous journal entry, record the correct entry, and include a note to the financial statements.
Reverse the erroneous journal entry, record the correct entry, include a note to the financial statements, and report the error to the authorities.
Reverse the erroneous journal entry and record the correct entry.
   
How are discontinued operations reported? (Select all that apply.)
 
As a separate line item on the income statement.
With separate reporting of the tax effect on the item of discontinued operations.
Above income from continuing operations.
Below income from continuing operations.
With tax on the discontinued operation included in total income tax expense.
   
Basic earnings per share is calculated as net income available to common shareholders divided by
 
average stockholders' equity.
average total assets.
ending retained earnings.
weighted average common shares outstanding.
   
To qualify as an operation for purposes of determining discontinued operations, which of the following must occur? (Select all that apply.)
 
The operation must have been in business for more than 3 years.
A strategic shift is represented that will have a major effect on financial results.
A component of the entity has been sold, disposed of, or is held for sale.
The operation must have completed a separate tax return in the past 2 years.
   
Net income is a part of
 
comprehensive income
gross income
cost of goods sold
gross margin
   
Revenues, expenses, gains, losses, and income tax related to a(n) ________________ __________________must be removed
from continuing operations and reported separately on the income statement.
Discontinued operations
   
The potential tax expense or benefits of items reported as components of Other Comprehensive Income
 
must be aggregated for all items and reported as one line item
can be shown separately for each item or aggregated and reported as one line item
must be presented separately for each item
   
The three types of accounting changes are a change in
 
- accounting principle.
- accounting estimate.
- reporting entity.
   
Accumulated other comprehensive income represents
the total of other comprehensive income to date.
   
The majority of errors discovered are not _______________, and are corrected in the year discovered.
material
   
U.S. GAAP requires that a statement of cash flows must be presented for

a. each period for which a balance sheet and income statement are prepared.
b. every reporting period to date.
c. each period in which an income statement is not prepared.
   
Which of the following is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding?

a. Return on equity
b. Diluted earnings per share
c. Basic earnings per share
d. Price to earnings
   
The statement of cash flows is useful because
- it reveals the company's ability to generate positive cash flow from its normal operations
- it provides information about liquidity
   
Net income is a portion of comprehensive income.
True
   
The classifications on the statement of cash flows are cash flows from


- financing activities.
- investing activities.
- operating activities.
   
Which of the following are acceptable methods for reporting comprehensive income? (Select all that apply.)
 
In one single statement of comprehensive income
in two consecutive statements - income statement and comprehensive income statement
   
Where are the elements of net income found on a cash basis rather than an accrual basis?


Operating activities section of the statement of cash flows
   
Other comprehensive income is reported in the current reporting period on the income statement or as an addition to the income statement,
and _________________ other comprehensive income is reported on the balance sheet. (Enter only one word.)
accumulated
   
Cash flows from ____ activities are related to the purchase and sale of long-term assets used in business operations. (Enter only one word.)
investing
   
The financial statement that provides information about cash receipts and cash disbursements for the period is the
statement of cash flows.
   
Which type of activities involve cash inflows and outflows from transactions with creditors and owners?
Financing
   
The statement of cash flows is useful because
accrual-based income is not an indication of cash flows.
   
Which is a significant noncash activity?
Signing a note payable in exchange for land.
   
The statement of cash flows classifies items as
operating, investing, and financing.
   
What is the formula for the asset turnover ratio?
Net sales divided by average total assets.
   
The operating activities section on the statement of cash flows includes the elements of net income on a(n) ________________ basis rather than a(n) __________________ basis. (Enter one word per blank.)
Cash, Accrual
   
Financial statements covering periods of less than one year are called _________
interim reports
   
Investing activities involve the acquisition and sale of (Select all that apply.)
 
inventories sold in normal operations.
long-lived assets used in business operations.
nonoperating investment assets.
   Cash borrowed or paid to a creditor is an example of a(n) _____ activity.
financing
   
Some _____ recognition is modified in interim reporting to cause interim statements to relate better to annual statements.
expense or cost
   
Which of the following are significant noncash activities?
Acquiring equipment by issuing a long-term note.
Acquiring land by issuing common stock.
   
How are discontinued operations and unusual items treated in interim financial statements under U.S. GAAP?
The full amount should be separately reported in the period in which the discontinued operation or unusual item occurs.
   
Gulf Corp. has the following information:

End of Year 1
Net sales $ 80,000
Total assets 600,000
Accounts receivable 30,000

End of Year 1
Net sales $ 100,000
Total assets 800,000
Accounts receivable 50,000

What is the asset turnover ratio for year 2 rounded to the nearest 1/1000?
0.143
   
Computations for EPS for interim reports under U.S. GAAP are based on what?
Conditions actually existing during the particular interim period.
  Interim reports are typically issued
 
quarterly
   
When an accounting change occurs during an interim period, the change is applied retrospectively. In subsequent interim periods of the same fiscal year, which of the following are disclosed? (Select all that apply.)
- Affect on income from continuing operations.
- Affect on related per share amounts.
- Affect on net income.
   
Which of the following are required minimum disclosures in interim financial statements? (Select all that apply.)
- contingencies
- Net income
- Sales
   
Which of the following would require modified accounting treatment for interim reporting under U.S. GAAP? (Select all that apply.)
 
- Advertising expenses incurred in the second quarter that will benefit the remainder of the year.
- Property taxes paid in January for the entire year assessment.
   
The treatment of discontinued operations and unusual items in interim reporting under U.S. GAAP is more consistent with the _____ view.
discrete
   
The earnings per share calculation for interim financial reporting under U.S. GAAP is consistent with which view?
Discrete view
   
Accounting changes made in an interim period are reported
retrospectively
   
Which of the following are required minimum disclosures in interim financial statements? (Select all that apply.)
 
Significant changes in financial position
Changes in accounting principles
Fair value of financial instruments
   
When an expense benefits more than just the period in which it is incurred, how is the expense treated under U.S. GAAP?
The expense should be allocated among the periods benefited.
   
Exercise 4-2 (Algo) Income statement format; single step and multiple step [LO4-1, 4-5]
The following is a partial trial balance for the Green Star Corporation as of December 31, 2021:
 

Account Title	Debits	Credits
Sales revenue		1,300,000
Interest revenue		33,000
Gain on sale of investments		53,000
Cost of goods sold	720,000
Selling expenses	175,000
General and administrative expenses	78,000
Interest expense	43,000
Income tax expense	133,000

 



There were 150,000 shares of common stock outstanding throughout 2021.
 
Required:
Prepare a single-step income statement for 2021, including EPS disclosures.
Prepare a multiple-step income statement for 2021, including EPS disclosures.
 
Prepare a single-step income statement for 2021, including EPS disclosures.
(Round EPS answer to 2 decimal places.)
 
 
Prepare a multiple-step income statement for 2021, including EPS disclosures.
(Amounts to be deducted should be indicated with a minus sign. Round EPS answer to 2 decimal places.)

Exercise 4-4 (Algo) Multiple-step continuous statement of comprehensive income [LO4-1, 4-5, 4-6]
The trial balance for Lindor Corporation, a manufacturing company, for the year ended December 31, 2021, included the following accounts:
 

Account Title	Debits	Credits
Sales revenue		2,460,000
Cost of goods sold	1,470,000
Selling and administrative expense	423,000
Interest expense	47,000
Gain on debt securities		87,000

 
The gain on debt securities is unrealized and classified as other comprehensive income.
The trial balance does not include the accrual for income taxes. Lindor's income tax rate is 25%.
There were 1,500,000  shares of common stock outstanding throughout 2021.
 
Required:
Prepare a single, continuous multiple-step statement of comprehensive income for 2021, including appropriate EPS disclosures.
(Round EPS answer to 2 decimal places.)
 

 
Explanation
Income tax expense = $520,000 × 25% = $130,000
Gain on debt securities = $87,000 − ($87,000 × 25%)
   
Exercise 4-7 (Algo) Income statement presentation; discontinued operations; restructuring costs [LO4-1, 4-3, 4-4]
Esquire Comic Book Company had income before tax of $1,400,000 in 2021 before considering the following material items:
  
Esquire sold one of its operating divisions, which qualified as a separate component according to generally accepted accounting principles.
The before-tax loss on disposal was $380,000. The division generated before-tax income from operations from the beginning of the year
through disposal of $580,000. The company incurred restructuring costs of $95,000 during the year.
  
Required:
Prepare a 2021 income statement for Esquire beginning with income from continuing operations. Assume an income tax rate of 25%.
Ignore EPS disclosures. (Amounts to be deducted should be indicated with a minus sign.)
 

 
Explanation
Income from operations of discontinued component (including loss on disposal of $380,000) = $200,000

Income from continuing operations:

Income before considering additional items	$	1,400,000
Decrease in income due to restructuring costs		(95,000	)
Income from continuing operations before income taxes		1,305,000
Income tax expense (25%)		(326,250	)
Income from continuing operations	$	978,750

 

Income from operations	$	580,000
Loss on sale of assets		(380,000	)
Income from operations of discontinued component, before tax		200,000

Income tax expense = $200,000 × 25% = $50,000
   
Exercise 4-9 (Algo) Discontinued operations; disposal in subsequent year; solving for unknown [LO4-4]
 
On September 17, 2021, Ziltech, Inc., entered into an agreement to sell one of its divisions that qualifies as a component of the
entity according to generally accepted accounting principles. By December 31, 2021, the company’s fiscal year-end, the division
had not yet been sold, but was considered held for sale. The net fair value (fair value minus costs to sell) of the division’s assets at
the end of the year was $16 million. The pretax income from operations of the division during 2021 was $6 million. Pretax income
from continuing operations for the year totaled $19 million.
The income tax rate is 25%. Ziltech reported net income for the year of $9.0 million.
 
Required:
Determine the book value of the division's assets on December 31, 2021.
(Enter your answer in whole dollars not in millions.)
 

 
Explanation

Pretax income from continuing operations	$	19,000,000
Income tax expense		(4,750,000	)
Income from continuing operations		14,250,000
Less: Net income		9,000,000
Loss from discontinued operations	$	5,250,000

 
$5,250,000 ÷ 75%* = $7,000,000 = Pretax loss from discontinued operations.
 
*1 − tax rate of 25% = 75%

Pretax income of division	$	6,000,000
Add: Pretax loss from discontinued operations		7,000,000
Impairment loss	$	13,000,000
Fair value of division’s assets	$	16,000,000
Add: Impairment loss		13,000,000
Book value of division’s assets	$	29,000,000

   
Exercise 4-13 (Algo) Statement of cash flows preparation; direct method [LO4-8]
The following summary transactions occurred during 2021 for Bluebonnet Bakers:
 

Cash Received from:
Collections from customers	$	500,000
Interest on notes receivable		12,000
Collection of notes receivable		55,000
Sale of investments		35,000
Issuance of notes payable		180,000
Cash Paid for:
Purchase of inventory		240,000
Interest on notes payable		8,000
Purchase of equipment		91,000
Salaries to employees		96,000
Payment of notes payable		41,000
Dividends to shareholders		36,000

 
The balance of cash and cash equivalents at the beginning of 2021 was $27,000.
 
Required:
Prepare a statement of cash flows for 2021 for Bluebonnet Bakers. Use the direct method for reporting operating activities.
(Amounts to be deducted should be indicated with a minus sign.)
 

Exercise 4-15 (Algo) Indirect method; reconciliation of net income to net cash flows from operating activities [LO4-8]
The accounting records of Hampton Company provided the data below ($ in thousands).
 

Net income	$	32,300
Depreciation expense		9,300
Increase in accounts receivable		5,500
Decrease in inventory		7,000
Decrease in prepaid insurance		1,950
Decrease in salaries payable		4,200
Increase in interest payable		1,350

 
Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
(Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands.)
 

   
Exercise 4-19 (Algo) IFRS; statement of cash flows [LO4-8, 4-9]
The statement of cash flows for the year ended December 31, 2021, for Bronco Metals is presented below.
 

BRONCO METALS
Statement of Cash Flows
For the Year Ended December 31, 2021
Cash flows from operating activities:
Collections from customers	$	408,000
Interest on notes receivable		5,100
Dividends received from investments		3,500
Purchase of inventory		(197,000	)
Payment of operating expenses		(70,000	)
Payment of interest on notes payable		(9,100	)
Net cash flows from operating activities					$	140,500
Cash flows from investing activities:
Collection of notes receivable		155,000
Purchase of equipment		(264,000	)
Net cash flows from investing activities						(109,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock		310,000
Dividends paid to shareholders		(51,000	)
Net cash flows from financing activities						259,000
Net increase in cash						290,500
Cash and cash equivalents, January 1						27,500
Cash and cash equivalents, December 31					$	318,000

 
Required:
Prepare the statement of cash flows assuming that Bronco prepares its financial statements according to International Financial Reporting Standards.
Where IFRS allows flexibility, use the classification used most often in IFRS financial statements.
(Amounts to be deducted should be indicated with a minus sign.)
 
 

 
Explanation
Consistent with U.S. GAAP, international standards also require a statement of cash flows. Consistent with U.S. GAAP, cash flows are classified as operating, investing, or financing. However, the U.S. standard designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows. Dividends paid to shareholders are classified as financing cash flows.

IAS No. 7, on the other hand, allows more flexibility. Companies can report interest and dividends paid as either operating or financing cash flows and interest and dividends received as either operating or investing cash flows. Interest and dividend payments usually are reported as financing activities. Interest and dividends received normally are classified as investing activities.
   
TB MC Qu. 4-109 (Static) Shively Mfg. Co. sold...
Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:
Investing cash inflows of $18,000.
   
Provincial would report the following amount of income tax expense as a separately stated line item in the income statement:
 
$150,000.
 
Explanation
($700,000 − $100,000) × 25% = $150,000
   
The Claxton Company manufactures children's toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP. How should Claxton report the sale in its income statement?
Report the income or loss from operations of the division in discontinued operations.
   
Major Co. reported 2021 income of $307,000 from continuing operations before income taxes and a before-tax loss on discontinued operations of $73,000. All income is subject to a 25% tax rate. In the income statement for the year ended December 31, 2021, Major Co. would show the following line-item amounts for income tax expense and net income:
 
$76,750 and $175,500 respectively.
 
Explanation

Income from continuing operations before income taxes	$	307,000
Income tax expense		76,750
Income from continuing operations	$	230,250
Loss on discontinued operations (net of $18,250 tax benefit)		(54,750	)
Net income	$	175,500

   
Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
Loss on the sale of equipment.
   
Intraperiod income tax presentation is primarily a matter of:
Allocation.
   
Brief Exercise 4-9 (Algo) Discontinued operations [LO4-4]
The semiconductor business of the California Microtech Corporation qualifies as a component of the entity according to GAAP.
The book value of the assets of the segment was $15 million. The loss from operations of the segment during 2021 was $3.90 million.
Pretax income from continuing operations for the year totaled $5.80 million. The income tax rate is 25%. Assume instead that the
estimated fair value of the segment’s assets, less costs to sell, on December 31 was $14 million rather than $15 million.
 
Prepare the lower portion of the 2021 income statement beginning with income from continuing operations before income taxes.
Ignore EPS disclosures.
(Amounts to be deducted and negative amounts should be indicated with a minus sign.
Enter your answers in whole dollars and not in millions.)
 

 
Explanation
Income tax expense = $5,800,000 × 25% = $1,450,000
 
Loss from operations of discontinued component:

Loss from operations	$	(3,900,000	)
Impairment loss ($15 million book value less $14 million net fair value)		(1,000,000	)
Loss from operations of discontinued component, before tax	$	(4,900,000	)

Income tax benefit = ($4,900,000) × 25% = $1,225,000
   
The following are summary cash transactions that occurred during the year for Hilliard Healthcare Co. (HHC):
 

Cash received from:
Customers	$	710,000
Interest on notes receivable		17,000
Collection of notes receivable		150,000
Sale of land		45,000
Issuance of common stock		250,000
Cash paid for:
Interest on notes payable		23,000
Purchase of equipment		145,000
Operating expenses		465,000
Dividends to shareholders		35,000

 
Prepare a statement of cash flows according to International Financial Reporting Standards.
(Amounts to be deducted should be indicated with a minus sign.)
 

 
Explanation
Under IFRS, interest received and interest paid usually are classified as investing and financing cash flows, respectively, not operating cash flows as with U.S. GAAP.
   
Brief Exercise 4-8 (Algo) Discontinued operations [LO4-4]
The semiconductor business of the California Microtech Corporation qualifies as a component of the entity according to GAAP. 
The book value of the assets of the segment was $17 million. The loss from operations of the segment during 2021 was $4.8 million.
Pretax income from continuing operations for the year totaled $6.8 million. The income tax rate is 25%. Assume that the semiconductor segment was not
sold during 2021 but was held for sale at year-end. The estimated fair value of the segment’s assets, less costs to sell, on December 31 was $19 million.
 
Prepare the lower portion of the 2021 income statement beginning with income from continuing operations before income taxes. Ignore EPS disclosures. 
(Amounts to be deducted and negative amounts should be indicated with a minus sign. Enter your answers in whole dollars and not in millions.)
 

   
Exercise 4-9 (Algo) Discontinued operations; disposal in subsequent year; solving for unknown [LO4-4]
On September 17, 2021, Ziltech, Inc., entered into an agreement to sell one of its divisions that qualifies as a component of the entity according to generally accepted accounting principles. By December 31, 2021, the company’s fiscal year-end, the division had not yet been sold, but was considered held for sale. The net fair value (fair value minus costs to sell) of the division’s assets at the end of the year was $15 million. The pretax income from operations of the division during 2021 was $5 million. Pretax income from continuing operations for the year totaled $18 million. The income tax rate is 25%. Ziltech reported net income for the year of $8.7 million.
 
Required:
Determine the book value of the division's assets on December 31, 2021.
(Enter your answer in whole dollars not in millions.)
 

 
Explanation

Pretax income from continuing operations	$	18,000,000
Income tax expense		(4,500,000	)
Income from continuing operations		13,500,000
Less: Net income		8,700,000
Loss from discontinued operations	$	4,800,000

 
$4,800,000 ÷ 75%* = $6,400,000 = Pretax loss from discontinued operations.
 
*1 − tax rate of 25% = 75%

Pretax income of division	$	5,000,000
Add: Pretax loss from discontinued operations		6,400,000
Impairment loss	$	11,400,000
Fair value of division’s assets	$	15,000,000
Add: Impairment loss		11,400,000
Book value of division’s assets	$	26,400,000

   
TB MC Qu. 4-63 (Algo) On August 1, 2021, Rocket Retailers adopted a plan to...
On August 1, 2021, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2022. On January 31, 2022, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated:
 

Operating loss Feb. 1, 2021–Jan. 31, 2022	$	121,000
Estimated operating losses, Feb. 1–June 30, 2022		72,000
Impairment of division assets at Jan. 31, 2022		12,000

In its income statement for the year ended January 31, 2022, Rocket would report a before-tax loss on discontinued operations of:
 
$(133,000)
 
Explanation
$(121,000) + $(12,000) = $(133,000)
 
   
The FASB's stated preference for reporting operating cash flows is the:
Direct method
   
TB MC Qu. 4-64 (Algo) On November 1, 2021, Jamison Inc. adopted a plan to...
On November 1, 2021, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2022. On December 31, 2021, the company's year-end, the following information relative to the discontinued division was accumulated:
 

Operating loss Jan. 1–Dec. 31, 2021	$	66	million
Estimated operating losses, Jan. 1 to April 30, 2022		89	million
Excess of fair value, less costs to sell, over book value at Dec. 31, 2021		15	million

In its income statement for the year ended December 31, 2021, Jamison would report a before-tax loss on discontinued operations of:
$66 million
   
TB MC Qu. 4-104 (Algo) Schneider Inc. had salaries payable of...
 
Schneider Inc. had salaries payable of $61,200 and $91,100 at the end of 2020 and 2021, respectively. During 2021, Schneider recorded $621,500 in salaries expense in its income statement. Cash outflows for salaries in 2021 were:
 
    $591,600.
 
Explanation
$621,500 – $29,900 increase in salaries payable = $591,600
   
Comprehensive income is the change in equity from:
Nonowner transactions.
   
Brief Exercise 4-6 (Algo) Discontinued operations [LO4-4]
On December 31, 2021, the end of the fiscal year, Revolutionary Industries completed the sale of its robotics business for $11.0 million.
The robotics business segment qualifies as a component of the entity according to GAAP. The book value of the assets of the segment was $8.0 million.
The income from operations of the segment during 2021 was $5.0 million. Pretax income from continuing operations for the year totaled $13.0 million. The income tax rate is 25%.
 
Prepare the lower portion of the 2021 income statement beginning with income from continuing operations before income taxes. Ignore EPS disclosures.
(Amounts to be deducted and negative amounts should be indicated with a minus sign.
Enter your answers in whole dollars and not in millions. For example, $4,000,000 rather than $4.)
 

 
Explanation
Income tax expense = $13,000,000 × 25% = $3,250,000
Income from operations of discontinued component, before tax:

Income from operations	$	5,000,000
Gain on sale of assets		3,000,000		($11.0 million less $8.0 million)
Income from operations of discontinued component, before tax	$	8,000,000

 
Income tax expense = $8,000,000 × 25% = $2,000,000
   
 
Brief Exercise 4-12 (Algo) Statement of cash flows; investing and financing activities [LO4-8]
The following are summary cash transactions that occurred during the year for Hilliard Healthcare Co. (HHC):
 

Cash received from:
Customers	$	820,000
Interest on notes receivable		28,000
Collection of notes receivable		260,000
Sale of land		56,000
Issuance of common stock		360,000
Cash paid for:
Interest on notes payable		34,000
Purchase of equipment		200,000
Operating expenses		520,000
Dividends to shareholders		46,000

 
Prepare the cash flows from investing and financing activities sections of HHC’s statement of cash flows.
(Amounts to be deducted should be indicated with a minus sign.)
 

   
Brief Exercise 4-4 (Algo) Multiple-step income statement [LO4-1, 4-3]
The following is a partial year-end adjusted trial balance.
 

Account Title	Debits				Credits
Sales revenue					$	330,000
Loss on sale of investments	$	28,000
Interest revenue						5,500
Cost of goods sold		175,000
General and administrative expense		43,000
Restructuring costs		51,500
Selling expense		26,500
Income tax expense		?

Income tax expense has not yet been recorded. The income tax rate is 25%.

a. Determine the operating income (loss).
b. Determine the income (loss) before income taxes.
c. Determine the net income (loss).
 

 
Explanation
a.

	Sales revenue		$	330,000
	Less:	Cost of goods sold		(175,000	)
		General and administrative expense		(43,000	)
		Restructuring costs		(51,500	)
		Selling expense		(26,500	)
	Operating income		$	34,000

b.

Operating income	$	34,000
Add: Interest revenue		5,500
Deduct: Loss on sale of investments		(28,000	)
Income before income taxes	$	11,500

c.

Income before income taxes	$	11,500
Income tax expense (25%)		(2,875	)
Net income	$	8,625

   
Exercise 4-10 (Algo) Earnings per share [LO4-5]
The Esposito Import Company had 1 million shares of common stock outstanding during 2021.
Its income statement reported the following items: income from continuing operations, $14 million; loss from discontinued operations,
$2.7 million. All of these amounts are net of tax.
 
Required:
Prepare the 2021 EPS presentation for the Esposito Import Company.
(Amounts to be deducted should be indicated with a minus sign. Round your answers to 2 decimal places.)