Question

LOL (the “Company”), an SEC registrant with a calendar year-end, is a manufacturer and distributor of...

LOL (the “Company”), an SEC registrant with a calendar year-end, is a manufacturer and distributor of sports equipment. The Company was created in 1989 and is headquartered in Southern California. The Company has manufacturing operations and numerous sales and administrative locations in the United States. LOL files a consolidated U.S. federal tax return. (This case will not consider the evaluation of the state jurisdictions; it will only consider the federal jurisdiction.)

As LOL’s auditors, you are now performing the Company’s year-end audit for the fiscal year ended December 31, 2010, and have the following information available to you:

• LOL draft income statement and excerpt from tax footnote as of December 31, 2010 (Handout 1).

• A deferred tax asset realization analysis showing pre-tax book income projections (Handout 2).

• The projected income schedule (realization analysis above) projects organic growth beginning in 2012 after stemming the decrease in pre-tax book income.

• LOL does not have the ability to carry back any losses to prior periods. • A significant customer declared bankruptcy in 2010; therefore, the Company wrote off all accounts receivable from this customer. The Company is considering the exclusion of such expense when evaluating whether future income is objectively verifiable.

• The Company does not have a history of operating losses or tax credit carryforwards expiring unused.

• The Company has identified the following possible tax-planning strategies: o Selling and leasing back manufacturing equipment that would result in a taxable gain of $20 million. o Selling the primary manufacturing facility at a gain to offset existing capital loss carryforwards.

Additional Facts — Intraperiod Allocation Consideration Assume that a valuation allowance of $105 million is recorded as of December 31, 2010 ($150 million deferred tax asset (DTA) less $45 million reversing deferred tax liabilities (DTL)). Further assume that during 2010, the Company recognized a loss of $50 million in accumulated other comprehensive income (AOCI) related to a pension adjustment from a loss in investment value. The Company’s effective tax rate, without the recognition of a valuation allowance, is 37 percent.

Additional Facts Assume that a valuation allowance of $105 million is recorded as of December 31, 2010 ($150 million DTA less $45 million reversing DTLs). Further assume that the Company’s projection for 2011 pre-tax book income of $0 is accurate, but the Company sells a component of the business and recognizes the component as a discontinued operation. The discontinued operations earn $20 million before tax, and the continuing operations lose $20 million before tax for a net pre-tax book income of $0. As described above, the Company has a full valuation allowance.

Required:

• Question 7a — Is there a tax benefit on the loss of $20 million from continuing operations?

• Question 7b — Is there a tax provision on the $20 million of income from discontinued operations?

Homework Answers

Answer #1

7a) It will be considered as seperate component of a income before extraordinary items.. Which will not be included for taxabe income.. There fore it is also known as net of tax.. It will give a tax benefit of $ 20 million.. It allows to carry forward taxable loss fom current period to future period.

7b) Income generated from discontinued operations will always be chargeable to tax under the head "profit and gains from business and operations" It will be chargeable at the normal tax rates chargeable to company.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
***PLEASE ANSWER ALL QUESTIONS** 3. On October 28, 2021, a company committed to a plan to...
***PLEASE ANSWER ALL QUESTIONS** 3. On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively....
***PLEASE ANSWER ALL QUESTIONS** 3. On October 28, 2021, a company committed to a plan to...
***PLEASE ANSWER ALL QUESTIONS** 3. On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively....
Zeus Company reports the following for the current year: Income from continuing operations before income tax...
Zeus Company reports the following for the current year: Income from continuing operations before income tax $500,000 Loss from discontinued operations $90,000* Weighted average number of common shares outstanding 40,000 Applicable tax rate 40% *Net of any tax effect Required: 1. Prepare a partial income statement for Zeus Company beginning with income from continuing operations before income tax. Zeus Inc. Partial Income Statement For the Year Ended December 31 $ $ $ 2. Calculate the earnings per common share for...
On October 28, 2021, a company committed to a plan to sell a division that qualified...
On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $1,990,000. The division's book value and fair value less cost to sell on December 31 were $2,940,000 and $3,620,000, respectively. What before-tax amount(s) should the...
On October 28, 2013, Mercedes Company committed to a plan to sell a division that qualified...
On October 28, 2013, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2013, the end of the company's fiscal year. The division's loss from operations for 2013 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should Mercedes...
Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both...
Chance Company had two operating divisions, one manufacturing farm equipment and the other office supplies. Both divisions are considered separate components as defined by generally accepted accounting principles. The farm equipment component had been unprofitable, and on September 1, 2021, the company adopted a plan to sell the assets of the division. The actual sale was completed on December 15, 2021, at a price of $800,000. The book value of the division’s assets was $1,410,000, resulting in a before-tax loss...
Saginaw Inc. completed its first year of operations with a pretax loss of $500,000. The tax...
Saginaw Inc. completed its first year of operations with a pretax loss of $500,000. The tax return showed a net operating loss of $600,000, which the company will carry forward. The $100,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming the current tax expense is zero , prepare the journal entries to record the deferred tax provision and the valuation...
For the year ending December 31, 2021, Olivo Corporation had income from continuing operations before taxes...
For the year ending December 31, 2021, Olivo Corporation had income from continuing operations before taxes of $1,330,000 before considering the following transactions and events. All of the items described below are before taxes and the amounts should be considered material. In November 2021, Olivo sold its PizzaPasta restaurant chain that qualified as a component of an entity. The company had adopted a plan to sell the chain in May 2021. The income from operations of the chain from January...
Esquire Comic Book Company had income before tax of $1,200,000 in 2021 before considering the following...
Esquire Comic Book Company had income before tax of $1,200,000 in 2021 before considering the following material items:    Esquire sold one of its operating divisions, which qualified as a separate component according to generally accepted accounting principles. The before-tax loss on disposal was $360,000. The division generated before-tax income from operations from the beginning of the year through disposal of $540,000. The company incurred restructuring costs of $75,000 during the year.    Required: Prepare a 2021 income statement for...
Analyzing and Interpreting Tax Footnote Under Armour, Inc. reports total tax expense on its income statement...
Analyzing and Interpreting Tax Footnote Under Armour, Inc. reports total tax expense on its income statement for year ended December 31, 2010 of $40,442 and cash paid for taxes of $38,773. The tax footnote in the company's 10-K filing, reports the following deferred tax information. Deferred tax assets and liabilities consisted of the following (in thousands): December 31 ($ thousands) 2010 2009 Deferred tax assets State tax credits, net of federal tax impact $ 1,750 $ -- Tax basis inventory...