Accounting: The Language of Business - Vol. 2 (Intermediate: Part 54)

Let's talk about how to fill out your 1984 tax return. Here's an often overlooked accounting technique that can save you thousands of dollars: For several days before you put it in the mail, carry your tax return around under your armpit. No IRS agent is going to want to spend hours poring over a sweat-stained document. So even if you owe money, you can put in for an enormous refund and the agent will probably give it to you, just to avoid an audit. What does he care? It's not his money.

Dave Barry

Statements of Net Income and Comprehensive Income (Part l)

by

Charles Lamson

EXAMPLE 5.1 Reporting Discontinued Operations When Company Is Holding the Discontinued Operation at the End of the Year

PROBLEM: ChooChoo, Inc. reported pre-tax income from all of its operations (including its toy car division) of $30 million for the year ended December 31, 2018. On August 1, 2018, ChooChoo committed to dispose of its toy car division. This division qualifies as a component of an entity that should be reported as a discontinued operation. The operating income related to this division for 2018 was $4 million. The carrying value of the toy car division exceeded the fair value less selling costs by $350,000. ChooChoo's income tax rate is 35% on all income. Prepare a partial statement of net income for 2018, beginning with income from continuing operations before tax.

SOLUTION: Income from continuing operations before tax only relates to income from continuing operations; thus, ChooChoo would report $26 million, which is $30 million less the $4 million associated with the discontinued operation. Income tax is 35% of $26 million ($9.1 million).

 ChooChoo should report $2.6 million of income from discontinued operations, which is the $4 million less tax expense of $1.4 million ($4 million * 35%). In addition, there is an after-tax remeasurement loss of $277,500, which is the total loss of $350,000 less the tax benefit of $122,500 ($350,000 * 35%). 

We now extend this example by assuming that ChooChoo sells the toy car division in the following year.

EXAMPLE 5.2 Reporting Discontinued Operations with Disposition during the Year 

PROBLEM: ChooChoo has pre-tax profit from all operations in 2019 of $32 million. This amount includes a $5 million operating loss from the toy car division incurred between the beginning of the year and August 15, the disposal date of the division. The $32 million profit does not include a pre-tax gain on the sale of the toy car division of $2 million. Prepare a partial statement of net income for ChooChoo for 2019, beginning with income from continuing operations before tax. 

SOLUTION: Income from continuing operations before tax relates only to income from continuing operations; thus, ChooChoo reports $37 million, which is $32 million with the $5 million loss associated with the discontinued operation added back in. Income tax is 35% of $37 million ($12.95 million).

 ChooChoo reports two income classifications in the discontinued operation section: 

1. An operating loss of $3.25 million, which is the $5 million loss less the tax benefit of $1.75 million ($5 million * 35%).

2. A gain from the disposal of $1.3 million, which is the $2 million pre-tax gain, less the associated tax expense of $0.7 million ($2 million * 35%). 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 189-190*

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