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:

Prepare a partial income statement for 2021 beginning with income from continuing operations. Ignore EPS disclosures.

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

Kandon Enterprises, Inc.

a) Partial Income Statement for the year ended December 31, 2021:

Income from continuing operations $533,333

Income tax (25%) 133,333

Income after tax $400,000

Before-tax loss from discontinuing

operations (140,000)

Impairment Loss (40,000)

Net Income $220,000

b) Partial Income Statement for the year ended December 31, 2021:

Income from continuing operations $533,333

Income tax (25%) 133,333

Income after tax $400,000

Before-tax loss from discontinuing

operations (140,000)

Net Income $260,000

Explanation:

After-tax rate = 25%

After-tax income from continuing operations for 2021 = $400,000

Before-tax income from continuing operations for 2021 will be:

= $400,000/0.75

= $533,333

2) No impairment gain is recognized until the asset has been disposed of, according to IFRS 5-Non-Current Assets Held for Sale and Discontinued Operations.