medium · Financial Accounting accounting-cycle-financial-statements
A company prepares a multi-step income statement. During Year 1 it sold a manufacturing division that qualifies as a discontinued operation, generating a $200,000 pretax operating loss from that division and a $500,000 pretax gain on its disposal. Continuing operations had $1,000,000 pretax income. The tax rate is 25% and there are no other items. A junior accountant computed income from continuing operations as $975,000 by netting the division's results into it.
What is the CORRECT income from continuing operations, and where do the division items belong?
- $750,000 from continuing operations; the $300,000 net pretax discontinued result is reported net of tax ($225,000) below continuing operations
- $975,000 from continuing operations; the discontinued items may remain blended in there since their combined pretax effect nets to a gain
- $750,000 from continuing operations; the $300,000 net discontinued result is shown pretax below the line with its associated tax left in continuing operations
- $1,000,000 from continuing operations; discontinued operations for the division are disclosed only in the footnotes, never presented on the statement's face
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