Question

How are discontinued operations reported?

a) As a separate line item on the income statement.
b) Above income from continuing operations.
c) Below income from continuing operations.
d) With tax on the discontinued operation included in total income tax expense.
e) With tax applied to the discontinued operation.

Answer 1

Discontinued operations are reported below income from continuing operations on the income statement, with tax on the discontinued operation shown separately within total income tax expense and applied to the operation specifically. This method provides transparency and helps users distinguish between ongoing and non-recurring earnings.

Step-by-step explanation:

When a company reports discontinued operations on its income statement, it refers to components of its business that have been disposed of or are classified as held for sale. The reporting of discontinued operations is prescribed by specific accounting standards, which dictate presentation and disclosure. According to Generally Accepted Accounting Principles (GAAP), discontinued operations are reported as follows:

Discontinued operations are typically presented as a separate component of income on the income statement, under the income from continuing operations. This is done to ensure clarity and to provide a more accurate representation of the income that can be expected from the company's ongoing operations. Each component of a discontinued operation must be reported separately, which includes any gain or loss from the disposal of the discontinued component and the results of operations of the discontinued component.

The tax effects are also disclosed separately. This is because the tax implications of the discontinued operations may be different from those of continuing operations, and showing these effects separately provides more transparency. The company will show the pre-tax income or loss from discontinued operations and then show the associated tax impact, which will then lead to the net income or loss from discontinued operations.

This delineation aids users of financial statements in distinguishing the earnings generated by the main business from those that are not expected to recur in the future. It also helps in analyzing the financial results more effectively, as it removes the effects of operations that are not going to be part of the normal business going forward.