Lupton Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $200,000 loss in the year of disposal. The loss on disposal of the segment was $100,000. If the tax rate is 30%, and income before income taxes was $1,600,000,
A) the income tax expense on the income before discontinued operations is $390,000.
B) the income from continuing operations is $1,120,000.
C) net income is $1,300,000.
D) the losses from discontinued operations are reported net of income taxes at $300,000.

Question

Quizplus · Accepted Answer

To calculate income tax expense, we first need to calculate income before discontinued operations:
Income before income taxes: $1,600,000
Loss from discontinued operations: $100,000
Income before discontinued operations: $1,500,000

Income tax expense on this amount is:
$1,500,000 x 0.30 = $450,000

Therefore, income from continuing operations is:
$1,500,000 - $450,000 = $1,050,000

However, we need to add back the after-tax effect of the loss from discontinued operations:
$200,000 x (1 - 0.30) = $140,000
$1,050,000 + $140,000 = $1,190,000

This means that net income is:
$1,190,000 - $100,000 (loss from discontinued operations, net of tax) = $1,090,000

Therefore, choice B is correct: the income from continuing operations is $1,120,000, which is the income before discontinued operations ($1,500,000) minus income tax expense ($450,000). The other choices are incorrect based on our calculations.