On 1 August 20X5, Graham Ltd. decided to discontinue the operations of its services division. The services division is not a separate corporation, but it is a major operating segment, financially and operationally. On 22 September 20X5, Graham closed a deal to sell the division to Frost Ltd. Frost will assume responsibility for the current liabilities (e.g., accounts payable and accrued liabilities) that pertain to the division. The facts pertaining to the sale are as follows:

On 31 December 20X5, the after tax net income, including the services division, was $300,000.

REQUIRED:

1. Give the entries to record the (a) reclassification and (b) sale of the services division.

2. Complete the 20X5 income statement, starting with income from continuing operations, after tax.

3. Explain what other disclosures and/or reclassifications are necessary in the 20X4 comparative financial statements and notes.

Transcribed Image Text:

Divisional assets, book values at 1 August 20X5 (cost of $475,000, less accumulated depreciation of $167,500) $307,500 Division assets, estimated fair values at 1 August 20X5 275,000 Liabilities assumed by purchaser, fair value = book value 135,000 Purchase price paid by Frost Ltd. 235,000 Division revenue to 22 September 20x5 345,000 Division profit (before taxes) to 22 September 20X5 27,500 Commission fee paid to the business brokerage that facilitated the 40,000 sale Graham Ltd. marginal income tax rate 32%