Question

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Part VII. Discontinued Operations and Earnings per Share (11 points)

Todd Corporation had pre-tax income for 2017 of $2,500,000. On December 31, 2017, Boyd disposed of a component of its business that represented a strategic shift in operation. That component had a Loss on Discontinued Operations of $450,000 (pre-tax). Boyd received $1,000,000 net cash proceeds from the disposal of that component. The component had a net book value of $900,000. Boyd pays taxes at a 30% rate. Boyd had 2,000,000 shares of common stock outstanding during 2017, and also had 50,000 shares of 5% preferred stock, issued at $100 par value.

Required:     

1. Prepare the Discontinued Operations portion of Todd Corporation’s 2017 Income Statement. Follow intraperiod tax allocation requirements. Show your work for partial credit.

2. Prepare the Earnings per Share information as it would be presented on the Income Statement at December 31, 2017.

EPS: Income from Continuing Operations:                 Loss from Discontinued Operations:                                    Net Income:

Answer 1

1)
Discontinued operations
Loss on Discontinued Operations	$450,000.00
Less: Applicable income tax reduction = $450,000 x 30%	-$135,000.00	$315,000.00
2)
Todd Corporation
Income Statement (Partial)
For the Year Ended December 31, 2017
Income from continuing operations before income tax *	$2,600,000.00
Less: Income Tax Expense = $2,600,000 x 30%	-$780,000.00
Income from continuing operations		$1,820,000.00
Discontinued operations
Loss on Discontinued Operations	$450,000.00
Less: Applicable income tax reduction = $450,000 x 30%	-$135,000.00	$315,000.00
Net Income		$1,505,000.00
Less: Preffered Dividend = $50,000 x $100 x 5%		$250,000.00
Net Income available for Commonstock holders		$1,255,000.00
Per share of common stock:
Income from continuing operations = $1,820,000/2,000,000	$0.91
Discontinued operations, net of tax = $315,000/2,000,0000	-$0.16
Net Income = $1505000 /2,000,000	$0.75
*Computation of income from continuing operations before income tax:
As previously stated	$2,500,000.00
Gain on sale of equipment [$1,000,000 - $900,000)]	$100,000.00
Restated	$2,600,000.00