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 $740,000. The book value of the division’s assets was $1,290,000, resulting in a before-tax loss of $550,000 on the sale. The division incurred a before-tax operating loss from operations of $160,000 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 $690,000. 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

The income statement for 2021 is shown as follows:- (Amounts in $)

Chance Company
Income Statement (Partial)
For the Year Ended December 31, 2021
Income from continuing operations		690,000
Gain/(Loss) from Discontinued Operations:
Loss from operations of discontinued component (before tax) (550,000+160,000)	(710,000)
Income tax benefit (710,000*25%)	177,500
Net Loss from Discontinued Operations (after tax)		(532,500)
Net Income		157,500
Earnings per share:
Income from continuing operations (690,000/100,000 shares)		$6.90
Loss from Discontinued Operations (532,500/100,000 shares)		($5.33)
Net Income (157,500/100,000 shares)		$1.57

Working Note:-

1) Total loss from discontinued operations (before tax) = $550,000+$160,000 = $710,000