exercise 4 - 8 (algo) discontinued operations; disposal in subsequent year lo4 - 4 kandon enterprises…
exercise 4 - 8 (algo) discontinued operations; disposal in subsequent year lo4 - 4 kandon enterprises, incorporated, 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, 2027, kandon adopted a formal plan to sell the division. the sale was completed on april 30, 2028. at december 31, 2027, the component was considered held for sale. consider the following: - on december 31, 2027, the companys fiscal year - end, the book value of the assets of the horse division was $251,000. on that date, the fair value of the assets, less costs to sell, was $210,000. - the before - tax loss from operations of the division for the year was $150,000. - the after - tax income from continuing operations for 2027 was $410,000. - the companys effective tax rate is 25%. required: 1. prepare a partial income statement for 2027 beginning with income from continuing operations. ignore eps disclosures. 2. prepare a partial income statement for 2027 beginning with income from continuing operations. assume that the estimated net fair value of the horse divisions assets was $420,000, instead of $210,000. ignore eps disclosures. complete this question by entering your answers in the tabs below. required 1 required 2 prepare a partial income statement for 2027 beginning with income from continuing operations. note: amounts to be deducted should be indicated with a minus sign. kandon enterprises, incorporated partial income statement for the year ended december 31, 2027 income from continuing operations $ 410,000 discontinued operations loss from operations of discontinued component 112,500 loss from operations of discontinued component 112,500 266,750 491,750 net income (loss) $ 266,750
Answer
Explanation:
Step1: Calculate loss from operations of discontinued component after - tax
The before - tax loss from operations of the division was $150,000. The after - tax amount is calculated as $150,000\times(1 - 0.25)=$112,500$.
Step2: Calculate impairment loss
The book value of the assets of the horse division was $251,000 and the fair value less costs to sell was $210,000. The impairment loss is $251,000 - 210,000=$41,000$. The after - tax impairment loss is $41,000\times(1 - 0.25)=$30,750$.
Step3: Calculate total loss from discontinued operations
The total loss from discontinued operations is the sum of the after - tax loss from operations and the after - tax impairment loss, which is $112,500+30,750=$143,250$.
Step4: Calculate net income
The after - tax income from continuing operations is $410,000$. The net income is $410,000-143,250 = $266,750$.
For the partial income statement:
| Particulars | Amount |
|---|---|
| Income from continuing operations | $410,000$ |
| Discontinued operations: | |
| Loss from operations of discontinued component (after - tax) | $112,500$ |
| Impairment loss of discontinued component (after - tax) | $30,750$ |
| Total loss from discontinued operations | $143,250$ |
| Net income | $266,750$ |
For the second part:
Step1: Since fair value less costs to sell ($420,000$) is greater than book value ($251,000$), there is no impairment loss.
The after - tax loss from operations of the discontinued component is still $150,000\times(1 - 0.25)=$112,500$.
Step2: Calculate net income
The after - tax income from continuing operations is $410,000$. The net income is $410,000-112,500=$297,500$.
The partial income statement:
| Particulars | Amount |
|---|---|
| Income from continuing operations | $410,000$ |
| Discontinued operations: | |
| Loss from operations of discontinued component (after - tax) | $112,500$ |
| Net income | $297,500$ |
Answer:
For Required 1:
| Particulars | Amount |
|---|---|
| Income from continuing operations | $410,000$ |
| Discontinued operations: | |
| Loss from operations of discontinued component (after - tax) | $112,500$ |
| Impairment loss of discontinued component (after - tax) | $30,750$ |
| Total loss from discontinued operations | $143,250$ |
| Net income | $266,750$ |
For Required 2:
| Particulars | Amount |
|---|---|
| Income from continuing operations | $410,000$ |
| Discontinued operations: | |
| Loss from operations of discontinued component (after - tax) | $112,500$ |
| Net income | $297,500$ |