Question

Discontinued Operations

D-1On December 31, 2019, Tooluth, Inc., completed the sale of one of its divisions for $5 million. The division qualifies as a separate component of an entity as defined by GAAP. The book value of the assets of the division was $3 million. The operating loss of the division during 2019 was $2.5 million. Pretax income from continuing operations for the year totaled $6 million. The income tax rate is 30%.

Required: Prepare the lower portion of the 2019 income statement beginning with pretax income from continuing operations. Ignore EPS.

D-2As of December 31, 2019, Tooluth, Inc., had one of its divisions held for sale. The division qualifies as a separate component of an entity as defined by GAAP. The estimated fair value of the division’s assets, less cost to sell on 12/31/19, was $5 million. The book value of the assets of the division was $3 million. The operating loss of the division during 2019 was $2.5 million. Pretax income from continuing operations for the year totaled $6 million. The income tax rate is 30%.

Required: Prepare the lower portion of the 2019 income statement beginning with pretax income from continuing operations. Ignore EPS.

D-3As of December 31, 2019, Tooluth, Inc., had one of its divisions held for sale. The division qualifies as a separate component of an entity as defined by GAAP. The estimated fair value of the division’s assets, less cost to sell on 12/31/19, was $2 million. The book value of the assets of the division was $3 million. The operating loss of the division during 2019 was $2.5 million. Pretax income from continuing operations for the year totaled $6 million. The income tax rate is 30%.

Required: Prepare the lower portion of the 2019 income statement beginning with pretax income from continuing operations. Ignore EPS.

Answer 1

D-1 . Answer

Particulars	Amount	Amount
Pretax income from continuing operations	$6 million
Less Income Tax @ 30%	$1.8 million
Income from continuing operations		$4.2 million
Discontinued operations:, net of tax:
Loss from operations of discontinued segment ($2.5 million × 70% See Note	($1.75 million)
Gain on sale of discontinued operations [($5 million -$3 million) ×70%] See Note	$1.4 million
Loss on discontinued operations		($0.35 million)
Net income ($4.2 million - $0.35 million)		($3.85 million)

Notes

1.

Loss from operations of discontinued segment pre tax	($2.5 million)
Less :Income Tax Exp   $2.5 million × 30%	$0.75 million
Loss from operations of discontinued segment	($1.75 Million)

2.

Gain on sale of discontinued operations [($5 million -$3 million) ×70%]	$2 million
Less :Income Tax Exp   $2 million × 30%	($0.60 million)
Gain on sale of discontinued operations	$1.4 Million

D- 2. Answer

Particulars	Amount	Amount
Pretax income from continuing operations	$6 million
Less Income Tax @ 30%	$1.8 million
Income from continuing operations		$4.2 million
Discontinued operations:, net of tax:
Loss from operations of discontinued segment See Note	($1.75 million)
Gain on sale of discontinued operations See Note	-
Loss on discontinued operations		($1.75 million)
Net income ($4.2 million - $0.35 million)		($2.45 million)

Note

1.

Loss from operations of discontinued segment pre tax	($2.5 million)
Less :Income Tax Exp   $2.5 million × 30%	$0.75 million
Loss from operations of discontinued segment	($1.75 Million)

2.

Loss or Gain on disposals of division shall not to be recorded or credited since divisions held for sale i.e. not yet sold)

D- 3. Answer ( Answer would be same as D-2)

Particulars	Amount	Amount
Pretax income from continuing operations	$6 million
Less Income Tax @ 30%	$1.8 million
Income from continuing operations		$4.2 million
Discontinued operations:, net of tax:
Loss from operations of discontinued segment ($2.5 million × 70% See Note	($1.75 million)
Gain on sale of discontinued operations See Note	-
Loss on discontinued operations		($1.75 million)
Net income ($4.2 million - $0.35 million)		($2.45 million)

Note

1.

Loss from operations of discontinued segment pre tax	($2.5 million)
Less :Income Tax Exp   $2.5 million × 30%	$0.75 million
Loss from operations of discontinued segment	($1.75 Million)

2.

Loss or Gain on disposals of division shall not to be recorded or credited since divisions held for sale i.e. not yet sold)