Question

Esquire Comic Book Company had income before tax of $1,000,000 in 2016 before considering the following material items:

1. 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 $350,000. The division generated beforetax income from operations from the beginning of the year through disposal of $500,000. Neither the loss on disposal nor the operating income is included in the $1,000,000 before-tax income the company generated from its other divisions.
2. The company incurred restructuring costs of $80,000 during the year.
Required: Prepare a 2016 income statement for Esquire beginning with income from continuing operations. Assume an income tax rate of 40%. Ignore EPS disclosures.

Answer 1

Esquire Comic Book Company

Income Statement

For the Year Ended December 31, 2016

Operating income $1,000,000

Restructuring costs ($80,000)

Income from continuing operations b/ Taxes $920,000

Income tax expense ($368,000)

Income from continuing operations $552,000

Discontinued operations:

• Operating income $500,000
• Loss on disposal ($350,000)
• Income tax on discontinued operations ($60,000)

Income from discontinued operations $90,000

Net income $642,000

Step-by-step explanation:

Income from discontinued operations must be reported separately, but any restructuring costs must be included as operational expenses.