As part of their normal course of business, companies sometimes sell off entire divisions or segments. The accounting treatment for such sales is composed of two components and a reporting format. Required:
a. Describe the accounting treatment and reporting format used for such sales.
b. Discuss why such sales are separated from other parts of the income statement.
a. The income/loss from the operations of the discontinued division or segment are removed from the continuing operations amount. The gain/loss from the actual sale is shown. Both amounts are reported net of applicable taxes. The numbers are shown in a separate section entitled "Earnings, Gains, and Losses from Discontinued Operations," which is shown directly below the subtotal of "Income from Continuing Operations."
b. Such sales are separated from continuing operations. Financial statement users should understand which items are from recurring operations and which items are not to continue into the future. These amounts are different from extraordinary items, as they arose from the normal business processes of the firm.
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