On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.

On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.
 
The following additional facts pertain to the transaction:

• The Formal Wear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
• The book value of Formal Wear's assets totaled $48 million on December 31, 2021.
• Formal Wear's operating income was a pre-tax loss of $10 million in 2021.
• Tango's income tax rate is 25%.

Suppose that the Formal Wear Division's assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $40 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co. would report discontinued operations of:

 Multiple Choice

$13.5 million loss.



$18.0 million loss.


$7.5 million loss.


$10.0 million loss.

 

Answer

 $13.5 million loss.

Explanation

75% (i.e., 1 – tax rate) × $18 million loss ($8 million impairment loss on Formal Wear's assets + $10 million operating loss = $18 million pretax loss).

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