Question

Avalia Ltd. decided on January 1, 2019 to discontinue its plastic-making division. The division, properly identified...

Avalia Ltd. decided on January 1, 2019 to discontinue its plastic-making division. The division, properly identified as a reportable segment, was sold on June 1, 2019. Division assets with a carrying value of $1,600,000 were sold for $1,000,000. Operating income from January 1, to May 30, 2019 for the division amounted to $250,000. Income taxes are at the rate of 30%. What amount should be reported on Avalia's income statement for the year ended December 31, 2019 under the caption "discontinued operations"? Show all of your work to maximize marks.

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Answer #1

Carrying value of division's asset = $1,600,000

Sale price of division assets = $1,000,000

Loss on disposal of plastic division = Carrying value of division's asset - Sale price of division assets

= 1,600,000 - 1,000,000

= $600,000

Operating income of plastic division = $250,000

Income tax rate = 30%

Income statement

Discontinued operations :
gain on operations of plastic division , net of tax (250,000 - 250,000 x 30%) 175,000
Loss on disposal of plastic division , net of tax (600,000 - 600,000 x 30%) -420,000
-$245,000
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