Question

On September 1, 20X1, Revsine Co. approved a plan to dispose of a segment of its business. Revsine expected that the sale would occur on March 31, 20X2, at an estimated pre-tax gain of $375,000. The segment had actual and estimated operating pre-tax profits (losses) as follows: Realized loss from 1/1/20X1 to 8/31/20X1 $ (300,000 ) Realized loss from 9/1/20X1 to 12/31/20X1 (200,000 ) Expected profit from 1/1/20X2 to 3/31/20X2 400,000 The expected profit from 1/1/20X2 to 3/31/20X2 was based on Revsine's expectations as of 12/31/20X1. Assume the marginal tax rate is 21%. Required: In its 20X1 income statement, what should Revsine report as profit or loss from discontinued operations (net of tax effects)?

Answer 1

Answer:

losses from discontinued operations 395,000

Explanation:

From 1/1/20X1 to 8/31/20X1 realized loss 300,000

From 9/1/20X1 to 12/31/20X1  realized loss 200,00

EXPECTED Profit from 1/1/20X2 to 3/31/20X2 400,000

As the accounting carries the accrued principles Revsine's expectations aer not accrued thus, do not included until realized.

The company has losses for 500,000 with a tax-rate of 21%

This generates a tax-shield of 105,000

net of taxes: 500,000 - 105,000 = 395,000