Strategy A—Existing operations would generate pretax income of $30,000 for the balance of the year and a new operating unit would begin operations in the second quarter of 2015, with projected pretax operating income (loss) of ($85,000), ($40,000), and ($20,000) for 2015 quarters 2 through 4, respectively. It is more likely than not that the operating units would generate pretax operating income of $30,000 in each of the next two years.
Strategy B—Existing operations would generate pretax loss of ($30,000) for the balance of the year and a 40% interest would be acquired in a limited liability company (LLC). The 40% interest would result in Waypine recognizing pretax income (loss) of ($40,000), $16,000, and $20,000 for 2015 quarters 2 through 4, respectively. It is likely that Waypine would recognize pretax operating income of $30,000 in 2016, traceable to this investment. Furthermore, it is anticipated that Waypine would dispose of its 40% interest in late 2016, resulting in a recognized gain of approximately $35,000.