Roger’s Plumbing, Inc., operates two segments: (1) a division that installs residential and commercial plumbing in buildings being constructed and (2) a service division that has both residential and commercial components. A recent construction boom has kept Roger’s so busy that it has been unable to handle all of the service work on a timely basis. Growing tired of phone messages from irritated customers who wanted their leak fixed yesterday (and unable to hire additional qualified employees), management decides in October to sell the service business, begins to advertise its availability, and has the division’s assets appraised. Ted Roger, CEO, believes the service business will be easier to sell if it is split into residential and commercial components. The appraisal results in the following information. Goodwill is the appraiser’s estimate of the value of the company’s customer base as Roger’s Plumbing plans to forward all service calls for a period of three years to whoever buys each component of the service business. Roger’s Plumbing has income before taxes of $2,756,000 for 2014 (the year management decides to sell the service division). This amount includes $185,400 residential service income and $215,000 commercial service income. Roger’s Plumbing is subject to an income tax rate of 35%.

Assume that Roger’s Plumbing sells the residential service component on December 5, 2014, for $99,500 (less disposal costs of $2,000). By year-end, the company has received three firm offers for the commercial service component that ranged from $82,500 to $87,000. Management is still actively seeking a better offer, but if none is obtained plans to sell the component to the highest bidder before the end of January 2015. The company’s auditors tell management that the consistency of the bids to date indicates an error in the appraisal and that an impairment loss should be recognized. Assume estimated costs of $2,500 to sell the commercial service component. Prepare an income statement for Roger’s Plumbing, Inc. (for 2014), beginning with income from continuing operations. For purposes of working this problem, report the various components of the gains/losses for discontinued operations separately for actual sales versus assets held for sale. Ignore per sharedisclosures.

  • CreatedSeptember 10, 2014
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