It is December 2012, and Rob Blandig, the CEO of Carmich Industries, has decided to sell the chemical division. He has received an offer for $350,000, but he is undecided about whether he wishes to complete the sale in 2012 or 2013. He is currently evaluating the effects of the sale on 2012 reported net income. Income from continuing operations for 2012 is estimated to be $1,930,000 (excluding the activities of the chemical division and management's bonus), and the company anticipates a weak year in 2013. Information about the division follows. The company's tax rate is 35 percent, and company management is paid a bonus each year in the amount of 20 percent × net income from continuing operations. For purposes of the bonus calculation, net income from continuing operations is not reduced by the bonus.
a. Prepare the 2012 income statement, beginning with net income from continuing operations, assuming that Rob accepts the offer, and explain how a user might interpret the items on the income statement in terms of earnings persistence.
b. Prepare the 2012 income statement, beginning with net income from continuing operations, assuming that Rob chooses not to sell the division in 2012, and explain how a user might interpret the items on the income statement in terms of earnings persistence.
c. Describe some of the important trade-offs Rob faces as he decides whether to complete the sale in 2012 or 2013.