On September 1, 2013, Jacob Furniture Mart enters into a tentative agreement to sell the assets of its office equipment division. This division qualifies as a component of the entity according to GAAP regarding discontinued operations. The division's contribution to Jacob's operating income for 2013 was a $3 million loss before taxes. Jacob has an average tax rate of 30%. Assume that Jacob had not yet sold the division's assets by the end of 2013. Further, assume that the fair value less costs to sell of the division's assets at December 31, 2013, was $24 million and was expected to remain the same when the assets are sold in 2014. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2013 income statement regarding the office equipment division? Explain where this information would be presented.
Jacob would report a loss of $3 million before taxes on discontinued operations in its 2013 income statement, as well as an impairment loss of $5 million (fair value less cost to sell of $24 million minus book value of $19 million), also related to discontinued operations.
The loss on discontinued operations would be reported net of the tax effect. The tax effect on the operating loss would be $3 million x 30% = $900,000. Therefore, the net operating loss on discontinued operations would be $3 million - $900,000 = $2.1 million. Since the impairment loss is not tax-deductible, there is no tax effect on it.
In summary, Jacob would report the following amounts related to the office equipment division in its 2013 income statement:
1. Loss from discontinued operations (net of tax effect): $2.1 million
2. Impairment loss on assets held for sale: $5 million
These amounts would be presented separately in the income statement, usually in a separate section titled "Discontinued Operations" or "Results of Discontinued Operations" below the results of the continuing operations.
According to the given information, if the office equipment division of Jacob Furniture Mart qualifies as a component of the entity according to GAAP regarding discontinued operations, Jacob would report the following in its 2013 income statement regarding the office equipment division:
1. Loss from Discontinued Operations: Jacob would report a loss before taxes of $3 million from the office equipment division as a separate line item on its income statement. This reflects the division's contribution to Jacob's operating income for 2013.
2. Income tax expense: Jacob would also report income tax expense on the loss from discontinued operations. Since Jacob has an average tax rate of 30%, the income tax expense would be 30% of the loss before taxes.
The presentation of this information would typically be in a separate section of the income statement called "Discontinued Operations." This section would show the loss from discontinued operations before taxes, the income tax expense related to the loss, and the net loss from discontinued operations (after taxes) as a separate line item. This allows stakeholders to easily identify the financial impact of the discontinued division on Jacob's overall financial performance.
To determine what Jacob Furniture Mart would report in its 2013 income statement regarding the office equipment division, we need to calculate the gain or loss on the sale of the division's assets.
First, we need to calculate the tax effect on the loss before taxes. The loss before taxes is $3 million, and Jacob has an average tax rate of 30%. So the tax effect would be 30% of the loss before taxes, which is $3 million * 30% = $900,000.
Next, we need to calculate the loss after taxes. The loss before taxes is $3 million, and the tax effect is $900,000. So the loss after taxes would be $3 million - $900,000 = $2,100,000.
Since the division qualifies as a component of the entity according to GAAP regarding discontinued operations, the loss after taxes would be presented separately as "Discontinued Operations" in the income statement. Specifically, it would be shown below the "Income from continuing operations" section and above the "Net income" section.
In the income statement, it would look something like this:
Income from continuing operations:
(Operating income from continuing operations)
Discontinued Operations:
Loss from office equipment division before taxes $3,000,000
Tax effect on loss before taxes $900,000
Loss from office equipment division after taxes $2,100,000
Net income:
(Income from continuing operations - Loss from discontinued operations)
So Jacob would report a loss of $2,100,000 in its 2013 income statement regarding the office equipment division under the "Discontinued Operations" section.