Question

Coronado Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $210000 loss in the year of disposal. The loss on disposal of the segment was $95000. If the tax rate is 20%, and income before income taxes was $1500000,

A. the income tax expense on the income before discontinued operations is $366000.

B. the income from continuing operations is $1200000.

C. the losses from discontinued operations are reported net of income taxes at $305000.

D. net income is $1195000.

Answer 1

Coronado Inc.'s income tax expense on income before discontinued operations is $300,000. The income from continuing operations is $1,200,000. The net income after accounting for the loss from discontinued operations net of taxes is $956,000.

Step-by-step explanation:

We need to calculate the different components of Coronado Inc.'s earnings after factoring in the loss from disposing an unprofitable segment and income taxes. The income tax expense on the income before discontinued operations is calculated as the income before taxes ($1,500,000) times the tax rate (20%), which equals $300,000 (not $366,000 as stated in the question). Therefore, the income from continuing operations is the income before taxes minus income tax expense, which is $1,500,000 - $300,000 = $1,200,000.

The loss from discontinued operations needs to be adjusted for tax effects. The loss before taxes from discontinuation is $210,000 + $95,000 = $305,000. To find the loss from discontinued operations net of taxes, we subtract the tax savings from the loss (20% of $305,000), which gives us $305,000 - ($305,000 * 20%) = $244,000.

Finally, the net income is the income from continuing operations minus the net-of-tax discontinued operations loss, which is $1,200,000 - $244,000 = $956,000.