Prescott Co management has committed to a plan to

dispose
Prescott Co management has committed to a plan to dispose

Prescott Co. management has committed to a plan to dispose of a group of assets

associated with the manufacture of railroad cars. This group of assets qualifies as a component
of an entity for financial reporting purposes. As of December 31, 2017, management has
located a likely purchaser and is in negotiations to complete the sale. It's expected that the
component will be sold in late 2018 for $5,900,000 and that the following costs will be incurred
in conjunction with the sale:
Brokers' fees......................................$360,000
Legal fees..........................................246,000
Closing costs........................................67,000
The railroad manufacturing assets have a historical cost of $12,000,000 and accumulated
depreciation of $5,500,000 computed using the straight-line method. These assets generated a
net loss during 2017 of $475,000 on sales of $1,800,000 and are expected to generate a loss of
$525,000 during 2018.
During 2017, Prescott had operating income, including the railroad component, of $7,400,000
and total productive assets, including the railroad component, of $94,500,000 (net of cumulative
straight-line depreciation). Sales for the company as a whole for the year ended December 31,
2017, were $20,000,000.
Required:
1. Compute the carrying value at December 31, 2017, of the railroad assets held for sale. How
are these assets reported on the December 31, 2017, balance sheet?
2. Prepare a partial income statement including the discontinued operations section for Prescott
Co. for the year ended December 31, 2017. Ignore income taxes.
3. Ignoring income taxes, compute return on continuing operating assets and operating margin
for Prescott Co. for 2017. Now assuming that the asset group did not qualify for discontinued
operations treatment, compute return on continuing operating assets and operating margin for
Prescott for 2017. Contrast the two sets of ratios and comment on your results.
4. How will the group of railroad assets be accounted for during 2018?

Prescott Co management has committed to a plan to dispose

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