 Hello everyone, let's take a look at this CPA questions that deals with discontinued operation. How should this information be reported in a comparative income statement for year four and year three under discontinued operation? So let's take a look at the data and determine how to report this information. On January 1st, year four, Adam decided to set an operating segment classified as discontinued operation. So we are standing at year four and this is where we decided to sell the operating segment, which is basically classified. We are told classified as discontinued operation. Therefore it needs to be reported separately. The sale took place in year four. So we decided in year four, the sale took place in year four. The sale resulted in a gain of 500,000. That's great. So we have a gain from the sale, gain on sale, and that's half a million. The operating segment reported a loss in year four of 125. Now this is year four. This is from the sale. Also in year four, we operated the business. So before we sold it, we operated for a period of time and we incur a loss of 125 and that's also in year four. Also in year three, which is the prior year. Let's go back and now have a prior year separately. The prior year, obviously we operated the business in year three and we had a loss from operating the business of 100,000. Now Adam did a great job selling this business for half a million because it has been operating at a loss for the past two years, but that's great. Maybe it has a future potential with a new owner. It doesn't matter, but we sold it at a gain. The ongoing tax rate for both periods, year three and year four, is 21%. So the question is, how should we present this information in a competitive income statement for year four and year three. Now you have to be careful here. We are talking about comparative. It means we are presenting year three and year four. How do we present this information? Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Well, the first thing we have to be aware of is everything has to be reported in discontinued operation at net of tax. So let's start to work this exercise starting with year four. In year four, what we do is we're going to report the gain and the loss separately. So on the income statement, literally you would show the gain and you would show the loss separately under discontinued operation. Now we're not going to show it separately. I'm going to net them out, but the effect is the same. So if I take the gain of 500,000 minus the loss, we have a net gain between selling the business and operating the business of 375,000 gain. That's the good news. The bad news is this, this gain will have to be reported net of tax. The tax rate is 21%. It means we are only going to keep of this amount 79% because we have to pay 21 in taxes. So 375 times 0.79 and that's the answer of 296-250. I'm going to do this one more time. This is the amount net of tax because net of tax is important to understand. So if I have 375 of gains and I have to pay 21% in taxes, so I'm going to take 375 times 0.21, I'm going to have to pay taxes 78,750. So 375 minus 78,750, that's going to give me, that's going to give me after I subtract the taxes from the amount that's going to give me 296-250. At this point, I can zoom in on A and B because I have to report the amount net of tax and it's 296-250. So I can eliminate C and D. Now I'm looking at year 3. So year 3 should be reported at, should I report anything under discontinued operation or report 79,000 under discontinued operation? That's the question. Now once you answer this question, you'll be able to answer this question properly. Now some might say, well, the sale took place in year 4, year 3 should not have anything under discontinued operation. Indeed, when we initially reported our numbers for year 3, so when we reported our number for year 3, we reported 0, we did not, we have not sold the operating segment yet for year 3. That's true, but that's not what we're standing. Now we are standing at year 4. When we are standing at year 4 and we're presenting year 3 and year 4, we have to assume that in year 3, it was a discontinued operation because the financial statements will have to be comparative. If you are looking at the performance of the company, you have to see what would happen if the segment was sold in year 3 because you want to compare the performance of the company. Therefore, what we have to do, we have to go back to year 3. When we present year 3 in addition to year 4 and show it net of tax, the loss net of tax. So we will show the 100,000, just like as we show the operating loss here. So we're going to have under operating segment, an operating loss of how much? Well, of 100,000 minus 21,000 equal an operating loss net of net of 79,000. So let's explain the loss separately. Indeed, the division incurred the loss of 100,000. That's the bad news indeed. However, since we incurred a loss, a loss is a deduction for tax purposes. So what does that mean? Well, you incurred the loss of 100,000, you're going to take this 100,000 and use the deduction on your income tax return. If you use the deduction on your income tax return, you are going to save the losses times the tax rate. The losses times the tax rate is 21,000. Therefore, you're going to save on your taxes 21,000. Therefore, your net loss or loss net of tax is only 79,000. Well, we know the answer now. So for year 4, we'll show the gain, the net gain net of tax 296,250. Now bear in mind, I'm going to say this one more time, on the actual income statement, you will show the gain and the loss separately. So let me show you exactly because I don't want to confuse you in case you are giving a complete financial statement. So the gain on the financial statement will be half a million times 0.79. So the gain net of tax 395, that's separately, then the loss to 125 times 0.79, 98, 750, that's the loss net of tax. Together, together, so let's net them 395, 395,000, 395,000 minus 98,750 should give us together, they would give us this number here, 296,250. But bear in mind, again, the reason I'm showing you this for presentation purposes, the gain, the gain from the sale and operating the business will be two separate lines. Even if this was an operating gain, it would still be two separate lines just for presentation purposes. You need to know this, you need to show the gain or the loss on the sale separately from operating the business, whether you have a gain or a loss on operating the business. But for year 3, we only have one line because we operated the business in year 3, we did not sell it. So this is a good question about discontinued operation, an important topic on the CPA exam, or if you are an accounting student, what should you do now? Go to Farhat and keep working MCQs, look at additional resources that's going to help you understand this topic better. 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