Question

On September 17, 2021, Ziltech, Inc., entered into an agreement to sell one of its divisions that qualifies as a component of the entity according to generally accepted accounting principles. By December 31, 2021, the company’s fiscal year-end, the division had not yet been sold, but was considered held for sale. The net fair value (fair value minus costs to sell) of the division’s assets at the end of the year was $11 million. The pretax income from operations of the division during 2021 was $4 million. Pretax income from continuing operations for the year totaled $14 million. The income tax rate is 25%. Ziltech reported net income for the year of $7.2 million.

 

Required:
Determine the book value of the division’s assets on December 31, 2021.

Answer 1

Pretax income from continuing operations            $14,000,000

 Income tax expense                                                     (3,500,000)

Income from continuing operations                          10,500,000

Less: Net income                                                              7,200,000

Loss from discontinued operations                           $ 3,300,000

 

$3,300,000 ÷ 75%* = $4,400,000 = Pretax loss from discontinued

 operations.

 

*1 – tax rate of 25% = 75%

 

Pretax income of division                                             $4,000,000

Add: Pretax loss from discontinued operations         4,400,000

Impairment loss                                                            $8,400,000

 

Fair value of division’s assets                                   $11,000,000

Add: Impairment loss                                                    8,400,000

Book value of division’s assets                                $19,400,000

Book value of division’s assets                                $19,400,000