Can I use a 220V line to supply two 110V receptacles?
What size are the wires?  A 40 AMP circuit is probably 8 or 10 AWG, neither of which will likely fit in the terminals of a 20 ampere receptacle.  Which means you'll have to use a 12 AWG pigtail, to attach the receptacle to the circuit.

Aside from that, you've got it about right.  


Remove the existing receptacle.
Install a new box.
Use properly sized twist-on wire connectors to attach a 12 AWG pigtail to one of the ungrounded (hot), the grounded (neutral), and the grounding conductors. 
Use a properly sized twist-on wire connector to cap the extra ungrounded (hot) conductor.
Remove the double pole 40 ampere breaker.
Install a single pole 20 ampere breaker.
Connect one of the ungrounded (hot) conductors (the one attached to the receptacle), to the new breaker.
Use a properly sized twist-on wire connector to cap the extra ungrounded (hot) conductor.
Install a plate to cover the empty hole in the panel cover (that was created by removing the double pole breaker).