Background: You have recently been hired as the new staff accountant at Midwest Mechanical Corporation. Midwest Mechanical Corporation is a $35 million (annual sales) company. The company machines parts for small outboard (boat) motors. The accounting department consists of the controller, staff accountant (you), and a parts manager (responsible for inventory accounting).

Outboard motors consist of three main sections. These include:

1. Top (outboard powerhead)
2. Mid-section
3. Outboard lower unit

$Millions	2020	2019	2018
Division	$Sales | %GM	$Sales | %GM	$Sales | %GM
Powerhead Division	$11.2 | 24.1%	$13.5 | 26.1%	$14.1 | 29.1%
Midsection Division	$12.9 | 29.2%	$12.1 | 28.8%	$12.2 | 27.5%
Lower Unit Division	$10.1 | 44.5%	$8.4 | 42.8%	$6.6 | 43.6%
Other	$0.8 | Not Available	$0.7 | Not Available	$0.6 | Not Avaialbe
Total	$35.0	$34.7	$33.5

At the end of 2020 Midwest Mechanical Corporation leadership team prepared the following business update for each division. Midwest Mechanicals customers consist primarily of independent boat repair shops in the Upper-Midwest.

Powerhead Division The Powerhead Division has experienced a steady decline in sales as well as a drop in gross margin. The complexity involved in machining parts for outboard powerhead far exceeds the level of expertise needed to machine parts in the other areas of an outboard motor. Midwest Mechanical Corporation has one machinist who has the necessary skills for this type of work. Unfortunately, this machinist plans to retire on July 15, 2021. Due to the relatively high cost of machining powerhead parts, the industry has experienced a new trend in customer behavior. Customers that need powerhead repairs involving the machining parts, are simply junking their outboard motor and buying new.

Midsection Division The Midsection Division has seen a slight increase in sales and gross margin. The skills of the machinists at Midwest Mechanical Corporation meet or exceed the required level of expertise to do this work. The cost of repair has proven to be a good economical solution for customers hoping to avoid purchasing a new outboard motor.

Lower Unit Division The Lower Unit Division has seen a solid increase in sales over the past few years. Machinists complete work on lower units quickly and a minimal level of expertise is required. The quick turnaround (fixing lower unit and getting the outboard motor back into the hands of the customer) makes repair the best option for customers. Damage to the lower unit parts is normally associated with less experienced boaters. The boating industry has seen an uptick in sales and expects this trend to continue.

Other Midwest Mechanical Corporation has a side business machining one-off parts for ATVs. Individual ATV owners often have a hard time finding machinists for parts repair. Generally, the level of expertise required for these repairs fits the skill set of Midwest Mechanical Corporations machinist. Midwest Mechanical Corporations leadership team believes that ATV parts repair could be a good fit for the company. Nationally, ATV sales have experienced double-digit growth. ATV customers appear to have more disposable income than boat owners and are happy to pay more for fast turnaround of repairs.

Current Events In February 2021, Midwest Mechanical Corporation announced to their customers that they will no longer service/machine the powerhead portion of outboard motors as of June 30, 2021. In the announcement, Midwest Mechanical was careful to remind customers the work they will continue (detailing to the customers the specific types of machining jobs completed for the midsection and lower unit).

On June 30, 2021, Midwest Mechanical Corporation sold specific equipment only used to machine powerhead parts. Specifically, they sold equipment that had a cost of $2.5 million and accumulated depreciation of $2.2 million. The equipment was sold for $2 million dollars.

For the first six months of 2021, Midwest Mechanical Corporations Powerhead Division had sales of $4.8 million and COGS of $3.7 million.

The Fiscal Year Ending December 31, 2021 income statement is presented below

Note: The supporting trial balance

	For the year Ended December 31		2021
Sale revenue
Sales discount
Sales Returns and allowance
Net sales		$34,365,000
Cost of Goods sold		$ 20,950,000
Gross profit		13,415,000
GP%		39%
Selling and Administrative
Selling expense	$4,950,000
Administrative Expenses	$2,925,000	$7,875,000
ncome from operations		$5,540,000
Other Revenues & Gains
Interest income	85,000
Gain on sale of equipment	$1,700,000
Other expenses % loss
Loss due to storm damage	$75,000
Interest expense	150,000	$(225,000)
Income before income tax		$7,100,000
income tax expense		$2,485,000	0.35
net income		$4,615,000
EPS		$4.62

Midwest Mechanical Corporation
Adjusted Trial Balance
December 31,	2021
				Debit	Credit
Cash				4,665,000
Accounts Receivable				4,800,000
Allowance for Doubtful Accounts					150,000
Prepaid Insurance				100,000
Short-Term Note Receivable				100,000
Inventory				9,500,000
Equipment				11,500,000
Accumulated Depreciation - Equipment					4,400,000
Building				1,500,000
Accumulated Depreciation - Building					800,000
Land				250,000
Long-Term Investments				1,100,000
Patent				1,000,000
Goodwill				500,000
Accounts Payable					4,650,000
Salaries and Wages Payable					150,000
Bond Payable - Long Term					5,000,000
Mortgage Payable					1,100,000
Common Stock		Par	$0.01		10,000
APIC					990,000
Retained Earnings					13,650,000
Dividends - Common				$500,000
Sales Revenue					35,300,000
Sales Discounts				325,000
Sales Returns and Allowance				610,000
Cost of Goods Sold				$20,950,000
Selling Expenses				$4,950,000
Administrative Expenses				$2,925,000
Interest Income					85,000
Loss Due to Storm Damage				$75,000
Interest Expense				$150,000
Income Tax Expense				$2,485,000
Gain on Sale of Equipment (Powerhead Division)					$1,700,000
				$67,985,000	$67,985,000

Situation: The controller has requested that you prepare a correct version of the income statement. The income statement on page 2 was automatically generated by the company's SAP accounting system. The problem is that the "system" did not properly account for the "Discontinued Operations," which of course is the Powerhead Division.

Prepare the income statement correctly breaking out the impact of discontinued operations. Note: A 35% tax rate is applied to both continuing and discontinued income.