Question

Kandon Enterprises, Inc., has two operating divisions; one manufactures machinery and the other breeds and sells horses. Both divisions are considered separate components as defined by generally accepted accounting principles. The horse division has been unprofitable, and, on November 15, 2021, Kandon adopted a formal plan to sell the division. The sale was completed on April 30, 2022. At December 31, 2021, the component was considered held for sale.

On December 31, 2021, the company’s fiscal year-end, the book value of the assets of the horse division was $383,000. On that date, the fair value of the assets, less costs to sell, was $330,000. The before-tax loss from operations of the division for the year was $270,000. The company’s effective tax rate is 25%. The after-tax income from continuing operations for 2021 was $530,000.

Required:

1. Prepare a partial income statement for 2021 beginning with income from continuing operations. Ignore EPS disclosures.

2. Prepare a partial income statement for 2021 beginning with income from continuing operations. Assume that the estimated net fair value of the horse division’s assets was $660,000, instead of $330,000. Ignore EPS disclosures.

Answer 1

1. KANDON ENTERPRISES INC. Partial Income Statement For the Year Ended December 31, 2021

Income From Continuing Operations		$530,000
Discontinued Operations;
Loss from Operations of discontinued components	$(323,000)
Income Tax Benefit	$80,750
Loss on discontinued operations		$(242,250)
Net Income (Loss)		$287,750

Working Notes;

Loss on discontinued operation	$(270,000)
Impairment Loss	$(53,000)
Net Loss Before Tax	$(323,000)
Tax at 25%	$80,750
Net loss on discontinued operation (Aftertax)	$(242,250)

Impairment Loss

Fair Value of Assets Less Costs to Sell	$330,000
(-) Book Value of Assets of Hourse Division	$383,000
Impairment Loss	$(53,000)

2. KANDON ENTERPRISES INC Partial Income Statement For the Year Ended December 31, 2021

Income From Continuing Operation		$530,000
Discontinued Operating Gain (Loss)
Loss from operations of discontinued components	$(270,000)
Income Tax Benefit 25%	$67,500
Loss on discontinued operation		$(202,500)
Net Income (Loss)		$327,500

No Impairment loss on Hourse division since fair value of assets is higher than book value of assets.