Thursday 7 May 2015

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, 2013, Kandon adopted a formal plan to sell the division. The sale was completed on April 30, 2014. At December 31, 2013, the component was considered held for sale.

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, 2013, Kandon adopted a formal plan to sell the division. The sale was completed on April 30, 2014. At December 31, 2013, the component was considered held for sale.
      On December 31, 2013, the company’s fiscal year-end, the book value of the assets of the horse division was $250,000. 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 40%. The after-tax income from continuing operations for 2013 was $400,000.

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Explanation: 1.
 Loss from operations of discontinued component (including impairment loss of $50,000) = (190,000)
 
 Loss on discontinued operations:
       
  Loss from operations $ (140,000 )
  Impairment loss ($250,000 − 200,000)   (50,000 )




      Net before-tax loss   (190,000 )
  Income tax benefit (40%)   76,000  




      Net after-tax loss on discontinued operations $ (114,000 )









2.
 Loss from operations of discontinued component = (140,000)
 Includes only the operating loss during the year. There is no impairment loss.

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