if you sell you business segment, what happen to 3 statements?
I know the accounting treatment for sales of fixed asset, but sales of business segment has some different factor, which is "transaction fee"
I googled how to find the gain on sales of business segment, it gives "selling price - owners equity(net worth) - transaction fee".
And... that "transaction fee" is messing up the balance on balance sheet...
Assume: selling price is 100, net worth is 40, transaction fee is 10, then gain on sales of business is 50. (Tax 20%)
On IS,
Gain on Sales 50
Tax (10)
Net income 40
On CFS
Operating activity:
Net income 40
Gain on Sales (50)
Investing Activity:
Proceed from sales 100
net change in cash: 90
On BS
Asset:
Cash 90
Net worth (40)
total asset: 50
Shareholders equity:
Retained earning 40
50 vs 40...
does not balance out.....
where I am messing up? what did I miss here?
Thank you so much in advance!!
if your gain on sale was 50, then the assets were on the balance sheet for 50 so when you back out net worth it should be (50) on the asset side, so increase to assets increase by 40, retained earnings increases by 40.
You are forgetting to back out the transaction fee from the proceeds from sales. Proceed from sales should be 90 (100 - 10).
Whenever I find myself in a situation where something doesn't make sense, I try to identify the odd part out. If you think about it, how can the net change in cash be 90, if you sell the business for 100, pay 10 in transaction fees and 10 in taxes?
Let me know if you would like me to elaborate :)
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