Gleeson Industries consists of four separate divisions: compressed wood products, chemicals, stone products, and plastics. On March 15, 2017, Gleeson sold the chemicals division for $625,000 cash. Financial information related to the chemicals division follows:
$$\begin{array}{l}
\text { Peried from } 1/1/17 \text { to } 3/15/17\
\begin{array} { | l | r | }
\hline \text { Sales } & \$ 175,000 \
\hline \text { Operating expenses } & 160,000 \
\hline \text { Net aperating income (1055) } & \$ 15,000 \
\hline & \
\hline \text { As of 3/15/17 } & \
\hline \text { Assets } & \$ 1,850,000 \
\hline \text { Liabilities } & 1,400,000 \
\hline
\end{array}
\end{array}$$
If the income tax rate for the company is 35%, what amount of income tax liability on the disposal of the business segment will be recognized?
A)$218,750
B)$ 61,250
C)$ 5,250
D)$157,500

Question

Gleeson Industries consists of four separate divisions: compressed wood products, chemicals, stone products, and plastics. On March 15, 2017, Gleeson sold the chemicals division for $625,000 cash. Financial information related to the chemicals division follows:
$$\begin{array}{l}
\text { Peried from } 1/1/17 \text { to } 3/15/17\
\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 175,000 \
\hline \text { Operating expenses } & 160,000 \
\hline \text { Net aperating income (1055) } & \$ 15,000 \
\hline & \
\hline \text { As of 3/15/17 } & \
\hline \text { Assets } & \$ 1,850,000 \
\hline \text { Liabilities } & 1,400,000 \
\hline
\end{array}
\end{array}$$
If the income tax rate for the company is 35%, what amount of income tax liability on the disposal of the business segment will be recognized?
A)$218,750
B)$ 61,250
C)$ 5,250
D)$157,500

Quizplus · Accepted Answer

The gain on the disposal of the business segment is calculated as the difference between the cash received and the net assets (assets minus liabilities) at the time of sale. The net assets are $1,850,000 - $1,400,000 = $450,000. The cash received is $625,000. Therefore, the gain is $625,000 - $450,000 = $175,000. The income tax liability is then 35% of the gain, which is $175,000 * 0.35 = $61,250.

Gleeson Industries Consists of Four Separate Divisions: Compressed Wood Products