Question

Assume these events happened to Bakko, Inc. in Year 4. Bakko uses December 31 for the annual reporting period. At the beginning of Year4, Bakko owns 12 donut stores and 30 gas stations. Each of the 42 businesses is a separate business component. Bakko sells 2 donut stores in Year4 on October 1. The disposition is not considered to be a strategic shift. Bakko sells 6 gas stations in urban areas on May 1. The disposition is considered to be a strategic shift.
Match each of the following descriptions to where it would most likely be reported on Bakko's corporate income statement for Year 4.
1. Gain of $12,000 on sale of some equipment from one of the gas stations that Bakko still owns at 12/31/Year 4.
2. Bakko receives $5,000 for a fuel contract that will begin in Year 5.
3. Bakko has $100,000 gain on the sale of the gas stations on May 1, Year 4.
4. Operating results through April 30,Year 4 for the gas stations that were sold.
5. Bakko has a $20,000 loss on the sale of the donut stores on October 1.
A. Part of income from continuing operations.
B. As a discontinued operation.
C. Not part of net income for Year 4.

Answer 1

Answer:

1. Gain of $12,000 on sale of some equipment from one of the gas stations that Bakko still owns at 12/31/Year 4.  - Part of income from continuing operations.

The gas station is still owned by Bakko so the gain received will form part of income from continuing operation.

2. Bakko receives $5,000 for a fuel contract that will begin in Year 5.  - Not part of net income for Year 4

As per the Revenue Recognition principle of Accounting, revenue is only to be recorded when earned which means that this revenue will be in the Year 5 income.

3. Bakko has $100,000 gain on the sale of the gas stations on May 1, Year 4.  - As a discontinued operation.

The gas station has been sold and so is a discontinued operation.

4. Operating results through April 30,Year 4 for the gas stations that were sold.  - As a discontinued operation.

The gas station has been sold and so is a discontinued operation. Will be reported in the Income statement as such.

5. Bakko has a $20,000 loss on the sale of the donut stores on October 1. - As a discontinued operation.

The donut store was sold and is no longer a part of Bakko so is a discontinued operation.