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 $240,000. On that date, the fair value of the assets, less costs to sell, was $200,000. The before-tax loss from operations of the division for the year was $140,000. The company’s effective tax rate is 25%. The after-tax income from continuing operations for 2021 was $400,000.

 

Required:
1. Prepare a partial income statement for 2021 beginning with income from continuing operations. Ignore EPS disclosures.
2. Repeat requirement 1 assuming that the estimated net fair value of the horse division’s assets was $400,000, instead of $200,000.

Answer 1

KANDON ENTERPRISES, INC.
Partial Income Statement
For the Year Ended December 31, 2021
Income from continuing operations ..............................	$ 400,000
Discontinued operations:
Loss from operations of discontinued component (including impairment loss of $40,000)* .............................	(180,000)
Income tax benefit**...................................................	45,000
Loss on discontinued operations ..................................	(135,000)
Net income ....................................................................	$ 265,000

 

            * Loss from operations of discontinued component, before tax: 

 

 

       Loss from operations                                                         $(140,000)

       Impairment loss ($240,000 – $200,000)                              (40,000)

        Loss from operations of

 discontinued component, before tax                             $(180,000)

 

       ** $180,000 × 25%

 

2.

KANDON ENTERPRISES, INC.
Partial Income Statement
For the Year Ended December 31, 2021
Income from continuing operations ..............................	$  400,000
Discontinued operations:
Loss from operations of discontinued component*....	(140,000)
Income tax benefit**...................................................	35,000
Loss on discontinued operations ..................................	(105,000)
Net income ....................................................................	$  295,000

 

*Includes only the operating loss during the year. There is no impairment loss.

 

** $140,000 × 25%

Net income ....................................................................

$  295,000