Menu
Home
Log in / Register
 
Home arrow Accounting arrow Using Accounting Information
< Prev   CONTENTS   Next >

1.2. Discontinued Operations

As you find time to read the business press, you will encounter many interesting articles about high-profile business decisions. Particularly popular with the press is coverage of a major corporate action to exit a complete business unit. Such disposals occur when a corporate conglomerate (i.e., a company with many diverse business units) decides to exit a unit of operation by sale to some other company, or by outright abandonment. For example, a computer maker may decide to sell its personal computer manufacturing unit to a more efficient competitor, and instead focus on its mainframe and service business. Or, a chemical company may simply decide to close a unit that has been producing a specialty product that has become an environmental and liability nightmare.

Whatever the scenario, if an entity is disposing of a complete business component, it will invoke the unique reporting rules related to "discontinued operations." To trigger these rules requires that the disposed business component have operations that are clearly distinguishable operationally and for reporting purposes. This would typically relate to a separate business segment, unit, subsidiary, or group of assets.

Below is an illustrative income statement for Bail Out Corporation. Bail Out distributes farming implements and sporting goods. During 20X7, Bail Out sold its sporting equipment business and

began to focus only on farm implements. In examining this illustration, be aware that revenues and expenses only relate to the continuing farming equipment. All amounts relating to operations of the sporting equipment business, along with the loss on the sale of assets used in that business, are removed from the upper portion of the income statement, and placed in a separate category below income from continuing operations.

BAIL OUT CORPORATION Income Statement For the Year Ending December 31, 20X7

Sales

$ 5,500,000

Cost of goods sold

3,300,000

Gross profit

$ 2,200,000

Operating expenses

Salaries

$ 635,000

Rent

135,000

Other operating expenses

300,000

1,070,000

Income from continuing operations before income taxes

$ 1,130,000

Income taxes

400,000

Income from continuing operations

$ 730,000

Discontinued operations

Loss from operation of sports equipment unit, including loss on disposal

$ 600,000

Income tax benefit from loss on disposal of business unit

130.000

Loss on discontinued operations

470.000

Net income

260 000

Importantly, if a company is merely disposing of a single manufacturing plant or some other set of assets that does not constitute a business component, then the discontinued operations reporting rules are not invoked. For instance, suppose Sail Out merely sold its facility in Georgia, but continued to distribute the same products at all of its other locations. This would not constitute a discontinued operation. The income statement might include the gain or loss on the sale of the Georgia location as a separate line item in the income statement (as follows), but it would not require the expanded disclosures necessitated for a discontinued operation.

SAIL OUT CORPORATION Income Statement For the Year Ending December 31, 20X7

Sales

$5,500,000

Cost of goods sold

3,300,000

Gross profit

$ 2,200,000

Operating expenses

Salaries

$ 635,000

Rent

135,000

Other operating expenses

300,000

Loss on sale of Georgia location

600.000

1.670.000

Income from continuing operations before income taxes

$ 530,000

Income taxes

270,000

Net income

$ 260 000

Before moving on, review Bail Out's income statement, noting that total income taxes were "split" between those applicable to continuing operations and discontinued operations. This method of showing the tax effects related to the discontinued operations is mandatory, and is called "intraperiod tax allocation." However, you should also note that only one income tax number is attributed to income from continuing operations; it is improper to further subdivide that amount of tax. For example, in the Sail Out income statement illustration, no attempt was made to match a portion of the total tax to the Georgia transaction.

As you will soon observe, intraperiod tax allocation is also applicable to other items that are reported below the income from continuing operation section of the income statement (additionally, intraperiod tax allocation can impact prior period adjustments and other scenarios beyond the scope of this discussion).

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel