Final answer:
The disposal of Leigh Corp.'s knit products division should be recognized as a discontinued operation and not as an extraordinary item or gain on sale. Financial results for that division should be reported separately from continuing operations. Historical results should be reclassified to reflect the change for comparison.
Step-by-step explanation:
When a company like Leigh Corp. decides to dispose of a division, the accounting treatment for such a decision has to align with the relevant accounting standards. The disposal of a segment of a business should be treated as a discontinued operation if it represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.
According to the generally accepted accounting principles (GAAP), such disposal should not be recorded as an extraordinary item since extraordinary items are no longer recognized in the income statement as of the update issued by the Financial Accounting Standards Board (FASB) in January 2015. Instead, Leigh Corp. should:
- Report the results of the knit products division separately from continuing operations on the income statement,
- Present any gain or loss from the disposal in the section for discontinued operations, and
- Reclassify historical financial results to reflect the division as discontinued operations for comparative purposes.
This ensures that users of the financial statements are aware that the results of operations from that division are not expected to continue in the future.