Question

3.

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 $405,000. On that date, the fair value of the assets, less costs to sell, was $350,000. The before-tax loss from operations of the division for the year was $290,000. The company’s effective tax rate is 25%. The after-tax income from continuing operations for 2021 was $550,000.

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 $700,000, instead of $350,000. Ignore EPS disclosures.

Answer 1

1.
KANDON ENTERPRISES INC
PARTIAL INCOME STATEMENT
For the year ended December 2021
Income from continuing operations	$550,000
Discontinued operations gain (loss):
Loss from operation of discontinued component	-$345,000
Income tax benefit	$86,250	345000*25%
Loss on discontinued operations	-$258,750
Net income	$291,250
Calculation of loss from operation of discontinued component
Before tax loss	$290,000
Impairment of asset (405000-350000)	$55,000
Total loss	$345,000
2.
KANDON ENTERPRISES INC
PARTIAL INCOME STATEMENT
For the year ended December 2021
Income from continuing operations	$550,000
Discontinued operations gain (loss):
Loss from operation of discontinued component	-$290,000
Income tax benefit	$72,500	290000*25%
Loss on discontinued operations	-$217,500
Net income	$332,500
In this case there is no impairment loss as the fair value of asset is higher than book value of asset and thus there would be only loss from operation