Question

Discontinued Operations Problem 2. On July 1, 20x1, the David Company announced its plans to sell Division X (a component of the company). By December 20x1, David Company had not sold the division and so it classifies the division as held for sale. During 20x1, David recorded the following revenues and expenses for the division. Sales Cost of goods sold Operating expenses Division X $700,000 600,000 300,000 On December 31, 20x1, Division X had $900,000 in assets and $825,000 of liabilities. On this date, David estimates that the fair value of Division X is $150,000. Assume a 30% income tax rate. What is the income/Loss reported on the 20x1l/S? If the division sold at a gain of $100,000 in 20x2, what would be reported on the I/S as the gain from the sale?

Answer 1

9'000 900 If division sold at a gain of $100000 Profit on sale 100 Tax @ 30% Profit on sale of Din 70 825 Assumption: Operating loss is already included in BS in liability side Currency in $000 FYO1 Value of division X Sales 700 Assets Less: COGS (600) Liabilities Gross profit 100 FV of DivX Less: Operating expense (300) David's estimated FV Operating Income/(loss) (200) Profit on sale Tax @ 30% Profit on sale of Div x 30 75 150 75 22.5 52.5 1. Income reported in FY2001 Income statement is $52,500 if the div is sold. 2. Income reported in FY2002 Income statement is $70,000.