GADGET WORLD, Inc. is an electronics retailer. In addition to operating its Gadget World product stores, for the last 5 years the company has run a service divisioncalled Nerd Patrolthat offered installation and repair service to its customers. The service business has not been as successful as management had hoped and the decision was made and announced on October 31, 2016 to get out of the service business. At this date, the applicable tax rate is 30%.

Case 1: Disposal Date Before Year-End

In this case, the disposal occurs before year end: the Services division is sold on November 30, 2016before the fiscal year ends on Dec. 31, 2016. The following worksheet shows GADGET WORLDs operating results for 2016 and 2015 (note: normally a company reports 3 years of results on its Income Statement, but were working with 2 years due to the limited space here):

	2016				2015
	Company	Divisions			Company	Divisions
	Total	Services	Products		Total	Services	Products
Sales	$225,000	$60,000	$165,000		$230,000	$80,000	$150,000
Cost of Goods Sold	$75,000	$20,000	$55,000		$110,000	$25,000	$85,000
Gross Profit	$150,000	$40,000	$110,000		$120,000	$55,000	$65,000
Less: Operating Expenses	$10,000	$5,000	$5,000		$10,000	$5,000	$5,000
Operating Income(loss)	$140,000	*$35,000	$105,000		$110,000	$50,000	$60,000
Gain(loss) on sale of assets
Income before taxes
Income tax expense/(benefit)
Net Income(loss)

* 2016 Services Div. operating income includes activity thru 11/30 only.

Required (continued on the next page):

1. What is the Operating income (loss) (before taxes) for the division that has been sold?

2016: ___________________ 2015: ___________________ (thru the disposal on 11/30 as indicated above)

2. Would we need to make a journal entry to record the operating income/loss results?

The assets of the Services Division were originally purchased for $4,300,000, but have accumulated depreciation (thru the 10/31 announcement date) of $2,300,000. When the assets are classified as held for sale, a journal entry is made to transfer the assets from an operating category (like Plant, Property & Equipment) to an investment (usually in Current Assets since the sale is expected within a year). Assets held for sale are not depreciated. For example:

(A) Assets Held For Sale 2,000,000 (A) Accumulated Depreciation 2,300,000 (A) Assets 4,300,000 note: Record classification of Services Division assets as held for sale

3. The Services Division was sold for $2,050,000, but $150,000 was spent in legal and closing costs to complete the sale. What is the gain or loss on this disposal? Complete the Gain/loss on sale of assets and Income before taxes rows of the worksheet above.

4. What journal entry should be made to record the disposal gain or loss?

5. What is the tax effect of the operating results and the disposal? Complete the Income tax expense/(benefit) and Net income(loss) rows of the worksheet above.

6. Prepare an Income Statement (assume 100,000 shares outstanding in both years):

		2016		2015
Sales
Cost of Goods Sold
Gross Profit
less: Operating Expenses
Income Before Taxes and Disc. Oper.
Income Tax Expense/(Benefit)
Income from Continuing Operations
Discontinued Operations:
Income(loss) from operation
Gain(loss) from disposal
Income tax expense (benefit)
Income(loss) from Disc. Oper.
Net Income
EPS from Continuing Operations
EPS from Discontinued Operations
Net Income per share