Question

On January 1, Year 4, Dart, Inc., entered into an agreement to sell the assets and product line of its Jay Division, which met the criteria for classification as an operating segment. The sale was consummated on December 31, Year 4, and resulted in a gain on disposal of $400,000. The division’s operations resulted in losses before income tax of $225,000 in Year 4 and $125,000 in Year 3. For both years, Dart’s income tax rate is 30%, and the criteria for reporting a discontinued operation have been met. In a comparative statement of income for Year 4 and Year 3, under the caption discontinued operations, Dart should report a gain (loss) of:________________.
Year4 Year3
A. $(122,500) $(87,500)
B.$(122,500) $0
C. $(157,500) $(87,500)
D.$(157,500) $0

Answer 1

Answer:

Year 4: $122,500 gain

Year 3: ($87,500) loss

Explanation:

Year 4

losses before taxes = ($225,000) × (1 - 30%) = ($225,000) × 70% = $157,500 net loss

gain on disposal = $400,000 x (1 - 30%) = $400,000 x 70% = $280,000 net gain

net gain = $280,000 - $157,500 = $122,500

Year 3

losses before taxes = ($125,000) x (1 - 30%) = ($125,000) x 70% = ($87,500) net loss