Question

A company with a discontinued operation gain of $31,100 and a tax rate of 30% will experience what effect on net income?

a) Net income will increase by $9,330.
b) Net income will decrease by $21,770.
c) Net income will increase by $31,100.
d) Net income will decrease by $9,330.

Answer 1

The company's net income will decrease by $9,330. (Option d is correct.)

Step-by-step explanation:

Tax effect: While a discontinued operation gain is considered income, it's treated differently for tax purposes compared to ongoing operations. A 30% tax rate applied to the gain ($31,100 * 0.3) results in a tax liability of $9,330.

Net income effect: This tax liability reduces the overall net income. Therefore, instead of increasing by the full amount of the gain, the company's net income will decrease by the tax effect:

Net income decrease = Discontinued operation gain - Tax liability

Net income decrease = $31,100 - $9,330 = $21,770

Therefore, although the discontinued operation is technically a gain, the tax implications lead to a decrease in net income by $9,330.

Option d is correct.