Question

Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both divisions are considered separate components as defined by generally accepted accounting principles. The farm equipment component had been unprofitable, and on September 1, 2021, the company adopted a plan to sell the assets of the division. The actual sale was completed on December 15, 2021, at a price of $600,000. The book value of the division’s assets was $1,000,000, resulting in a before-tax loss of $400,000 on the sale. The division incurred a before-tax operating loss from operations of $120,000 from the beginning of the year through December 15. The income tax rate is 25%. Chance’s after tax income from its continuing operations is $550,000.

 

Required:
Prepare an income statement for 2021 beginning with income from continuing operations. Include appropriate EPS disclosures assuming that 100,000 shares of common stock
 were outstanding throughout the year.

Answer 1

CHANCE COMPANY
Partial Income Statement
For the Year Ended December 31, 2021
Income from continuing operations ..............................	$ 550,000
Discontinued operations:
Loss from operations of discontinued component
(including loss on disposal of $400,000)* .............................	(520,000)
Income tax benefit**...................................................	130,000
Loss on discontinued operations ...................................	(390,000)
Net income ....................................................................	$ 160,000
Earnings per share:
Income from continuing operations ..............................	$ 5.50
Loss on discontinued operations ..................................	(3.90)
Net income ....................................................................	$ 1.60

 

* Loss from operations of discontinued component, before tax: 

 

Loss from operations                    $(120,000)

Loss on sale of assets                    (400,000)  ($600,000 less $1 million)

Loss from operations of

 discontinued component,

 before tax                                    $520,000)

 

       ** $520,000 × 25%

before tax                                    $520,000)