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1)A machine was bought for $10,000 on 1 January 20X6
1)A machine was bought for $10,000 on 1 January 20X6. It was sold on 30 September 20X9 for $5,000. The machine was depreciated using straight-line method over 10 years with no residual value. What is the gain or loss?
2)Freda's Florist has the following before-tax income statement items for the year ended December 31, 2021: Income before Continuing Operations $200,000 Income on Discontinued Operations $80,000 All income statement items are subject to a 20% income tax rate. How much Income Tax Expense and Income on the Discontinued Operation section should be presented in its 2021 Income Statement? $40,000 and 580,000, respectively $40,000 and 564,000, respectively $56,000 and 564,000, respectively $56,000 and $80,000, respectively
Expert Solution
1)
Solution
Machine Purchase Price = $ 10,000
Less-Depreciation for 4 years = $ (4,000) (10,000/10x4)
Cost Price = $ 6,000
Sale Value = $ (5,000)
Loss on Sale of Machine = $ 1,000
2)
Calaculation of amount of income interest expense and Income on the discontinued operations:
The correct option is
- $40000 and $64000 respectively
Explanation:
Given
Income before continuing operations = $200000
Income on discontinued operations = $80000
Tax rate = 20%
While presenting income statement
• income tax expense comprises of only the tax on income from continuing operations irrespective of total interest interest expense.
• income on discontinued operations should be presented as net of taxes
That implies,
Income tax expense
= (income from continuing operations × tax rate)
= $200000×20%
= $40000
Income on discontinued operations, net of taxes
= $80000 - ($80000×20%)
= $80000 - $16000
= $64000
Presentation of income statement is as follows
| Income from continuing operations before taxes | $200000 |
| Less: income tax expense | ($40000) |
| Income from continuing operations | $160000 |
| Discontinued operations: | |
| Income on discontinued operations, net of taxes | $64000 |
| Net income | $224000 |
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