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

Under discontinued operations, Dart should report a net gain of $122,500 for Year 4 as a result of operational losses after tax and a gain on disposal after tax, and a net loss of $87,500 for Year 3, only accounting for operational losses after tax.

Step-by-step explanation:

In determining the gain or loss from discontinued operations, we need to consider the results of operations (losses before income tax) and the gain from the disposal of the division, taking into account the effect of taxes. For Year 4, Dart Inc. had a loss before taxes of $225,000 and a gain on disposal of $400,000. The income tax effect at the rate of 30% must be taken into account for both the operational loss and the gain on disposal.

• Year 4 operational loss before tax: $225,000
• Tax effect on operational loss for Year 4 (30% of $225,000): $67,500
• Year 4 gain on disposal before tax: $400,000
• Tax effect on gain for Year 4 (30% of $400,000): $120,000
• Net gain for Year 4: Gain on disposal after tax ($400,000 - $120,000) minus operational loss after tax ($225,000 - $67,500) = $280,000 - $157,500 = $122,500

For Year 3, the division incurred a loss before income tax of $125,000 and operation of the division did not result in any gain as the disposal occurred in Year 4.

• Year 3 operational loss before tax: $125,000
• Tax effect on operational loss for Year 3 (30% of $125,000): $37,500
• Net loss for Year 3: Operational loss after tax ($125,000 - $37,500) = $87,500

Therefore, under the caption discontinued operations, Dart should report a net gain of $122,500 for Year 4 and a net loss of $87,500 for Year 3. The correct answer is option B.

Answer 2

Year 4: $122,500 gain

Year 3: ($87,500) loss

Step-by-step 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