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

Answer 1

(a)

KANDON ENTERPRISES INC.
Partial Income Statement
For the year ended December 31, 2021
Income from continuing operations			400000
Discontinued operations gain (loss)
Loss from operations of discontinued Operations		-140000
Loss on disposal of asset		-40000
Net loss from operations of discontinued operations		-180000
Income tax benefit		45000
Net loss from operations of discontinued operations after tax			-135000
Net Income			265000

Working Note:

Gain or loss on sale of assets:

Loss on sale of asset = Fair Market Value - Book Value = 200,000 - 240,000 = (40,000)

Amount of income tax benefit:

Income tax benefit on loss on discontinued operations = Net loss on discontinued operations X Tax rate =180,000 X 25% = 45,000

(b)

KANDON ENTERPRISES INC.
Partial Income Statement
For the year ended December 31, 2021
Income from continuing operations			400000
Discontinued operations gain (loss)
Loss from operations of discontinued Operations		-140000
Income tax benefit		35000
Net loss from operations of discontinued operations after tax		-105000	-105000
Net Income			295000

Working Note:

Loss from operations of discontinued operations = (140,000)

Included only the operating loss during the year. There is no impairment loss.