Question

Crimson Corp. has a component that is a discontinued operation. The component incurred a loss from operations of $40,000. The component was sold with an additional loss of $160,000. The tax rate is 30%. What is the income tax effect for the discontinued operation? A. Income tax expense of $80,000.
B. Income tax benefit of $56,000.
C. Income tax benefit of $80,000.
D. Income tax expense of $56,000.

Answer 1

Income tax benefit of $60,000

Explanation:

• Crimson Corp. had a loss from operations
• Crimson Corp. sold the asset for a loss  
• Crimson Corp. lost money with the asset  
• An income tax benefit was generated
• By adding the losses we get $40,000 + $160,000 = $200,000
• Income tax rate @ 30% can be calculated as $200,000 * 30%
• Income tax benefit = $60,000