Eeyore Corporation had two operating divisions, one manufacturing cooking utensi
ID: 2550592 • Letter: E
Question
Eeyore Corporation had two operating divisions, one manufacturing cooking utensils and the other herb garden kits. Both divisions qualified as separate components of the entity. On September 30, 2016, the company adopted a plan to sell the assets of the herb garden kits division. The herb garden kits division incurred before-tax operating loss for 2018 of $4.5 million. . Pretax income from continuing operations for the Eeyore Corporation for the year totaled S50 million. Eeyore Corporation has an average tax rate of 35%. Required: Consider independently the appropriate accounting by Eeyore Corporation under the following two scenarios. ScenarioL:Assumethat Eeyore Corporation sold the herb garden kit division's assets on December 28, 2018, for $32 million. The book value of the division's assets was $30 million at that date Prepare a partial income statement for 2018 beginning with income from continuing operations before income taxes. Include EPS disclosures. There were 10 million shares of common stock outstanding throughout 2018Explanation / Answer
Scenario - I
Eeyore Corporation
Calculation
Partial Income statement
For the Year Ended December 31, 2018
Income from continuing operations
32,500,000
Before-tax income from its continuing operations is $50,000,000
Tax expense = Before tax income x tax rate = 50,000,000 x 35% = 17,500,000
After –tax income from its continuing operation = 50,000,000 – 17,500,000 = 32,500,000
Discontinued operations
Los from operations of discontinued component (Include gain on disposal of $2,000,000)
(2,500,000)
Gain on sale of assets = Sales price – Book value = 32,000,000 – 30,000,000 = 2,000,000
Loss from operations: (4,500,000)
Total before-tax loss = 2,000,000 + (4,500,000) = (2,500,000)
Income tax benefit
875,000
Tax benefit: 2,500,000 x 35% = 875,000
Loss on discontinued operations
(1,625,000)
Total after-tax loss: (2,500,000) + 875,000 = (1,625,000)
Net income
30,875,000
Net income = CO + DO = 32,500,000 + (1,625,000) = 30,875,000
Earnings per share:
10,000,000 shares of common stock were outstanding
Income from continuing operations
3.25
32,500,000/ 10,000,000 = 3.25 per share
Loss from discontinued operations
(0.1625)
(1,625,000) / 10,000,000 = (0.1625) per share
Net income
3.0875
3.25 + (0.1625) = 3.0875 per share
Scenario - II
Eeyore Corporation
Calculation
Partial Income statement
For the Year Ended December 31, 2018
Income from continuing operations
32,500,000
Before-tax income from its continuing operations is $50,000,000
Tax expense = Before tax income x tax rate = 50,000,000 x 35% = 17,500,000
After –tax income from its continuing operation = 50,000,000 – 17,500,000 = 32,500,000
Discontinued operations
Los from operations of discontinued component (Include impairment loss of $1,000,000)
(5,500,000)
Impairment loss = Sales price – Book value = 24,000,000 – 25,000,000 = (1,000,000)
Loss from operations: (4,500,000)
Total before-tax loss = (1,000,000) + (4,500,000) = (5,500,000)
Income tax benefit
1,925,000
Tax benefit: 5,500,000 x 35% = 1,925,000
Loss on discontinued operations
(3,575,000)
Total after-tax loss: (5,500,000) + 1,925,000 = (3,575,000)
Net income
28,925,000
Net income = CO + DO = 32,500,000 + (3,575,000) = 28,925,000
Eeyore Corporation
Calculation
Partial Income statement
For the Year Ended December 31, 2018
Income from continuing operations
32,500,000
Before-tax income from its continuing operations is $50,000,000
Tax expense = Before tax income x tax rate = 50,000,000 x 35% = 17,500,000
After –tax income from its continuing operation = 50,000,000 – 17,500,000 = 32,500,000
Discontinued operations
Los from operations of discontinued component (Include gain on disposal of $2,000,000)
(2,500,000)
Gain on sale of assets = Sales price – Book value = 32,000,000 – 30,000,000 = 2,000,000
Loss from operations: (4,500,000)
Total before-tax loss = 2,000,000 + (4,500,000) = (2,500,000)
Income tax benefit
875,000
Tax benefit: 2,500,000 x 35% = 875,000
Loss on discontinued operations
(1,625,000)
Total after-tax loss: (2,500,000) + 875,000 = (1,625,000)
Net income
30,875,000
Net income = CO + DO = 32,500,000 + (1,625,000) = 30,875,000
Earnings per share:
10,000,000 shares of common stock were outstanding
Income from continuing operations
3.25
32,500,000/ 10,000,000 = 3.25 per share
Loss from discontinued operations
(0.1625)
(1,625,000) / 10,000,000 = (0.1625) per share
Net income
3.0875
3.25 + (0.1625) = 3.0875 per share
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