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, 20X1, 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 20X2 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 20X1 of $475,000 on sales of $1,800,000 and are expected to generate a loss of $525,000 during 20X2.

During 20X1, 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, 20X1, were $20,000,000.

Required:

1. Compute the carrying value at December 31, 20X1, of the railroad assets held for sale. How are these assets reported on the December 31, 20X1, balance sheet?

2. Prepare a partial income statement including the discontinued operations section for Prescott Co. for the year ended December 31, 20X1. Ignore income taxes.

3. Ignoring income taxes, compute return on continuing operating assets and operating margin for Prescott Co. for 20X1. 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 20X1. Contrast the two sets of ratios and comment on your results.

4. How will the group of railroad assets be accounted for during 20X2?