Urbana Coffee Company reported the following in its 2017 annual report.
On September 20, 2017, we completed the spin-off of Champaign Tea, Inc. to shareowners of Urbana Coffee. Urbana Coffee distributed a dividend of two shares of Champaign Tea common stock for every 25 shares of Urbana Coffee common stock. Cash was paid for fractional shares. The distribution of Champaign Tea common stock is considered a tax-free transaction for us and for our shareowners, except for the cash payments for fractional shares, which are generally taxable.
We recorded pretax charges of $150 million ($108 million after-tax, or $0.07 per diluted share) for costs related to the spin-off of Champaign Tea. These costs primarily consisted of banking and legal fees, as well as filing fees, printing and mailing costs.
Required:
a. Explain the accounting for spin-offs.
b. How did the spin-off affect Urbana Coffee's net income in 2017?
c. Use the financial statements effect template, below, to show the spin-off effects on Urbana Coffee's financial statements. Assume the book value of Champaign Tea was $7,200 million.

Question

Urbana Coffee Company reported the following in its 2017 annual report. 
On September 20, 2017, we completed the spin-off of Champaign Tea, Inc. to shareowners of Urbana Coffee. Urbana Coffee distributed a dividend of two shares of Champaign Tea common stock for every 25 shares of Urbana Coffee common stock. Cash was paid for fractional shares. The distribution of Champaign Tea common stock is considered a tax-free transaction for us and for our shareowners, except for the cash payments for fractional shares, which are generally taxable.
We recorded pretax charges of $150 million ($108 million after-tax, or $0.07 per diluted share) for costs related to the spin-off of Champaign Tea. These costs primarily consisted of banking and legal fees, as well as filing fees, printing and mailing costs.
Required:
a. Explain the accounting for spin-offs.
b. How did the spin-off affect Urbana Coffee's net income in 2017?
c. Use the financial statements effect template, below, to show the spin-off effects on Urbana Coffee's financial statements. Assume the book value of Champaign Tea was $7,200 million.

Quizplus · Accepted Answer

The Answer of Urbana Coffee Company reported the following in its 2017 annual report. 
On September 20, 2017, we completed the spin-off of Champaign Tea, Inc. to shareowners of Urbana Coffee. Urbana Coffee distributed a dividend of two shares of Champaign Tea common stock for every 25 shares of Urbana Coffee common stock. Cash was paid for fractional shares. The distribution of Champaign Tea common stock is considered a tax-free transaction for us and for our shareowners, except for the cash payments for fractional shares, which are generally taxable.
We recorded pretax charges of $150 million ($108 million after-tax, or $0.07 per diluted share) for costs related to the spin-off of Champaign Tea. These costs primarily consisted of banking and legal fees, as well as filing fees, printing and mailing costs.
Required:
a. Explain the accounting for spin-offs.
b. How did the spin-off affect Urbana Coffee's net income in 2017?
c. Use the financial statements effect template, below, to show the spin-off effects on Urbana Coffee's financial statements. Assume the book value of Champaign Tea was $7,200 million.

Urbana Coffee Company Reported the Following in Its 2017 Annual