Question

Salamander Inc. is a food processing company that operates divisions in three major lines of food products: cereals, frozen fish, and candy. On 13 September 20X1, the Board of Directors voted to put the candy division up for sale. The candy division’s operating results had been declining for the past several years due to intense competition from large international players such as Nestlé and Cadbury.

The Board hired the consulting firm Atelier LLP to conduct a search for potential buyers. The consulting fee was to be 5% of the value of any sale transaction.

By 31 December 20X1, Atelier had found a highly interested buyer for the candy division, and serious negotiations were underway. The buyer was a food conglomerate based in Brazil; it offered $4.7 million cash.

On 25 February 20X2, after further negotiations, the Salamander’s board accepted an enhanced Brazilian offer to buy the division for $4.9 million. The Salamander shareholders approved the sale on 5 March 20X2. The transfer of ownership took place on 31 March 20X2.

Salamander’s income tax rate is 20%. Other information is as follows (before tax, in thousands of dollars):

	13 September 20X1							31 December 20X1
	Book Value			Fair Value				Fair Value
Candy division’s net assets:
Current assets	$	910			$	820			$	760
Property, plant, and equipment (net)		4,600				3,100				3,300
Current liabilities		(1,000	)			(1,000	)			(1,000	)
	$	4,510			$	2,920			$	3,060
Net earnings (loss) of the candy division:
13 September to 31 December 20X1										470
1 January to 31 March 20X2										(580	)

Required:
1. Prepare whatever journal entries are appropriate at 13 September 20X1, 31 December 20X1, 25 February 20X2, 5 March 20X2, and 31 March 20X2. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands, not millions or in whole Canadian dollar.)

2. Assume that the after-tax earnings from continuing operations amounted to $5 million in 20X1. Prepare the lower section of the earnings section of the 20X1 SCI (Enter your answers in thousands, not millions or in whole Canadian dollar.).

Answer 1

1. Journal entries -

Date	Particulars	Reference	Dr	Cr
13 September 20X1	Impairment Expense Losses A/c		$       1,590
	To Plant & Property equipments			$       1,500
	To Current Assets			$            90
	(Being recognition of Impairment loss)
31 December 20X1	No Journal entry required
25 February 20X2	No Journal entry required
5 March 20X2	No Journal entry required
31 March 20X2	Cash A/c		$       4,900
	Current Liabilities A/c		$       1,000
	To Plant Property & equipments			$       3,300
	To Current Assets			$          760
	To Accumulated losses			$          110
	To Taxes			$          288
	To capital reserve			$       1,442
	(Being discontinued transfer recorded)
31 March 20X2	Consultancy Fee A/c		$          245
	To Cash A/c			$          245

2. Assume that the after-tax earnings from continuing operations amounted to $5 million in 20X1. Prepare the lower section of the earnings section of the 20X1 SCI -

Sr. No.	Particulars	Amount
a.	Earning from Continuing operations after tax	$   5,000
b.	Gain on disposal of Discontinuing segments	$   1,442
c.	Earning from Disontinued operations After tax	$       110
d.	Earnings of 20X1 SCI (a+b-c)	$   6,332