Ace Corporation decided to sell its medical supplies business segment for $500,000, on September 1, Year 1. The disposal date is November 1, Year 1. The book value of the segment's net assets is $650,000. The pre-tax income for the segment for the period January 1 - September 1, Year 1, was a loss of $90,000; the pre-tax income for the segment for September and October was a loss of $20,000. Assuming a tax rate of 40%, choose the correct reporting for discontinued operations in the income statement of Ace Corporation, for the year ended December 31, Year 1. $$\begin{array} { | l | l | }
\hline &\text { Income (loss) from Discontinued operations } & \text { Gain (loss) from disposal of discontinued operations } \
\hline 1& ( \$ 90,000 ) & ( \$ 170,000 ) \
\hline 2 & \$ 0 & \$ \$ 144,000 ) \
\hline 3& ( \$ 66,000 ) & ( \$ 90,000 ) \
\hline 4& ( \$ 54,000 ) & \$ \$ 102,000 ) \
\hline
\end{array}$$

Question

Ace Corporation decided to sell its medical supplies business segment for $500,000, on September 1, Year 1. The disposal date is November 1, Year 1. The book value of the segment's net assets is $650,000. The pre-tax income for the segment for the period January 1 - September 1, Year 1, was a loss of $90,000; the pre-tax income for the segment for September and October was a loss of $20,000. Assuming a tax rate of 40%, choose the correct reporting for discontinued operations in the income statement of Ace Corporation, for the year ended December 31, Year 1. $$\begin{array} { | l | l | } 
\hline &\text { Income (loss) from Discontinued operations } & \text { Gain (loss) from disposal of discontinued operations } \
\hline 1& ( \$ 90,000 ) & ( \$ 170,000 ) \
\hline 2 & \$ 0 & \$ \$ 144,000 ) \
\hline 3& ( \$ 66,000 ) & ( \$ 90,000 ) \
\hline 4& ( \$ 54,000 ) & \$ \$ 102,000 ) \
\hline
\end{array}$$

Quizplus · Accepted Answer

The income (loss) from discontinued operations before taxes is the sum of the pre-tax losses from January 1 to September 1 ($90,000) and from September to October ($20,000), totaling $110,000. After applying the tax benefit (40% of $110,000), the net loss from operations is $66,000 ($110,000 - $44,000). The loss on disposal is calculated as the book value of the segment's net assets ($650,000) minus the selling price ($500,000), resulting in a loss of $150,000 before taxes. After applying the tax benefit (40% of $150,000), the net loss on disposal is $90,000 ($150,000 - $60,000). Therefore, the correct reporting is a loss from discontinued operations of $66,000 and a loss from disposal of discontinued operations of $90,000.

Ace Corporation Decided to Sell Its Medical Supplies Business Segment