On December 31, 20X1, Company X completed the sale of its robotics business for $9 million. The robotics business segment qualifies as a component of the entity, according to GAAP. Consider the following additional information:
- The book value of the assets of the segment was $7 million at the time of the sale.
- The income from operations of the segment during 20X1 was $4 million.
- Pretax income from other continuing operations for the year totaled $12 million.
- The income tax rate is 25%.
Prepare the lower portion of the 20X1 income statement beginning with income from continuing operations before income taxes.
Answer (1)
To prepare the lower portion of the 20X1 income statement for Company X, we need to understand how to report the discontinued operations separately from the continuing operations. Under GAAP, when a business segment qualifies as a component of an entity and is sold, its results must be shown separately in the income statement.
Here's the step-by-step preparation:
Income from Continuing Operations Before Income Taxes :
Pretax income from other continuing operations: $12 million
Income Tax Expense for Continuing Operations :
Income tax rate is 25%, so: Income Tax Expense = Pretax Income × Tax Rate = 12 million × 0.25 = 3 million
Income from Continuing Operations After Income Taxes :
Income from Continuing Operations = 12 million − 3 million = 9 million
Discontinued Operations :
Income from Operations of the Discontinued Segment (Net of Tax) :
Income from operations: $4 million
Income tax expense on operations: 4 million × 0.25 = 1 million
Net income from operations: 4 million − 1 million = 3 million
Gain on Sale of the Discontinued Segment (Net of Tax) :
Gain on sale before tax: Sale Price - Book Value = $9 million - $7 million = $2 million
Income tax on gain: 2 million × 0.25 = 0.5 million
Net gain on sale: 2 million − 0.5 million = 1.5 million
Net Income from Discontinued Operations :
Total Income from Discontinued Operations = 3 million + 1.5 million = 4.5 million
Total Net Income :
Total Net Income = Income from Continuing Operations + Net Income from Discontinued Operations = 9 million + 4.5 million = 13.5 million
Therefore, the lower portion of the income statement for 20X1 is as follows:
Income Before Taxes from Continuing Operations: $12 million Income Tax Expense: $3 million Income from Continuing Operations: $9 million
Discontinued Operations: Net Income from Discontinued Operations: $4.5 million
Net Income: $13.5 million
This presentation ensures a clear distinction between the continuing and discontinued operations, providing a transparent view of the company's performance for the year.
