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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, 2018, Kandon adopted a formal plan to sell the division. The sale was completed on April 30, 2019. At December 31, 2018, the component was considered held for sale. On December 31, 2018, the company's fiscal year-end, the book value of the assets of the horse division was $437,000. On that date. the fair value of the assets, less costs to sell, was $370,000. The before-tax loss from operations of the division for the year was $310,000. The company's effective tax rate is 40%. The after-tax income from continuing operations for 2018 was $570,000. Required: 1. Prepare a partial income statement for 2018 beginning with income from continuing operations. Ignore EPS disclosures. 2. Prepare a partial income statement for 2018 beginning with income from continuing operations. Assuming that the estimated net fair value of the horse division's assets was $740,000, instead of $370,000. Ignore EPS disclosures

Answer 1

Continuing operations have going concern while discontinued operations have stopped. There are losses aggregated on discontinued operations and so, as result, they are being closed. On loss, tax benefits accrue to the company.

                                               

Partial Income Statement

                                                For the Year Ended December 31,2018

Income from continuing operations (A)	$        570,000
Discontinued Operations:
Loss from operations of discontinued component (437,000 – 370,000 + 310,000)	$    ( 377,000 )
Income tax credit (377,000*40%)	$        150,800
Loss on discontinued operations (B)	$        226,200
Net Income (loss) = A-B	$         343,800

b. Assuming net fair value of horse division’s assets is $ 740,000.

When the fair value of assets is greater than book value, there is no loss and it shall be treated as goodwill. This will have no treatment in income statement

Partial Income Statement

                                                For the Year Ended December 31,2018

Income from continuing operations (A)	$        570,000
Discontinued Operations:
Loss from operations of discontinued component (above Note)	$    ( 310,000 )
Income tax credit (310,000*40%)	$        124,000
Loss on discontinued operations (B)	$        186,000
Net Income (loss) = A-B	$         384,000