Jacks Corporation decided to sell its playing card business segment for $600,000, on September 1, Year 1. The disposal date is November 1, Year 1. The book value of the segment's net assets is $550,000. The pre-tax income for the segment for the period January 1 - September 1, Year 1, was a loss of $80,000; the pre-tax income for the segment for September and October was $30,000. Assuming a tax rate of 40%, choose the correct reporting for discontinued operations in the income statement of Jacks Corporation, for the year ended December 31, Year 1. $$\begin{array} { | l | l | }
\hline &\text { Income (loss) from Discontinued operations } & \text { Gain (loss) from disposal of ciscontinued operations } \
\hline 1& ( \$ 50,000 ) & \$ 50,000 \
\hline 2& ( \$ 48,000 ) & \$ 48,000 \
\hline 3& ( \$ 30,000 ) & \$ 30,000 \
\hline 4& \text { There is no disc losure necessary bec ause there is no net gain or loss for Y ear } 1 \text { on discontinued operations. } \
\hline
\end{array}$$

Question

Jacks Corporation decided to sell its playing card business segment for $600,000, on September 1, Year 1. The disposal date is November 1, Year 1. The book value of the segment's net assets is $550,000. The pre-tax income for the segment for the period January 1 - September 1, Year 1, was a loss of $80,000; the pre-tax income for the segment for September and October was $30,000. Assuming a tax rate of 40%, choose the correct reporting for discontinued operations in the income statement of Jacks Corporation, for the year ended December 31, Year 1. $$\begin{array} { | l | l | } 
\hline &\text { Income (loss) from Discontinued operations } & \text { Gain (loss) from disposal of ciscontinued operations } \
\hline 1& ( \$ 50,000 ) & \$ 50,000 \
\hline 2& ( \$ 48,000 ) & \$ 48,000 \
\hline 3& ( \$ 30,000 ) & \$ 30,000 \
\hline 4& \text { There is no disc losure necessary bec ause there is no net gain or loss for Y ear } 1 \text { on discontinued operations. } \
\hline
\end{array}$$

Quizplus · Accepted Answer

According to IFRS 5, discontinued operations should be reported separately in the income statement. In this case, the playing card business segment has been sold and it qualifies as a discontinued operation.

The gain or loss on disposal of the segment should be reported separately from the operating results of the segment. The gain or loss on disposal is calculated as the difference between the selling price ($600,000) and the book value of the net assets ($550,000), which is $50,000.

The operating results of the segment should also be reported separately. Since the segment incurred losses of $80,000 from January 1 to September 1, and generated income of $30,000 from September 1 to November 1, the net operating loss is $50,000 ($80,000 - $30,000). Since the tax rate is 40%, the tax benefit from the loss is $20,000 ($50,000 x 40%).

Therefore, the correct reporting for discontinued operations in the income statement of Jacks Corporation for the year ended December 31, Year 1, is:

Revenue from discontinued operations (selling price of segment): $600,000
Expenses from discontinued operations (book value of net assets): ($550,000)
Gain on disposal of discontinued operation: $50,000
Operating loss from discontinued operation: ($50,000)
Tax benefit from loss: $20,000
Net loss from discontinued operation: ($30,000)

Choice B correctly reflects this reporting.

Jacks Corporation Decided to Sell Its Playing Card Business Segment