[Anonymous]

Hi everyone, on F1-23, the example to calculate loss from discontinued operations is to to calculate the loss from operations for the whole year, irregardless of the fact that management did not decide until April 30th. Below is the example and solution.

“The Golf Division of All Sports Company is losing $200,000 per month. The Board of Directors decides

on April 30, Year 1 to dispose of the Golf Division. The carrying value of the Golf Division on April 30,

Year 1 is $4,000,000, and its fair value less costs to sell is $2,200,000.

After months of negotiations, the division’s net assets are sold on June 30, Year 2 for $2,000,000. In

the meantime, the Golf Division has continued losing $200,000 per month. All Sports Company’s

income tax rate is 40%.How should the disposal of the Golf Division be reported on All Sports Company’s Year 1 and Year 2 financial statements?

REPORTING FOR YEAR 1:

The Golf Division was not disposed of until Year 2 and would be reported as “held for sale” in the Year

1 financial statements. An impairment loss would be recognized in Year 1 because fair value less costs to sell is lower than carrying value. The continuing loss from the Golf Division would also be included in discontinued

operations in Year 1:

Impairment loss = $2,200,000 − $4,000,000 = $1,800,000

Loss from operations = $200,000 × 12 = $2,400,000

Total loss from discontinued operations (after-tax) = ($1,800,000 + $2,400,000) × (1 − 40%) =

$2,520,000

Now, look at this MCQ from Becker.

On October 1, Year 1, Wand, Inc. committed itself to a formal plan to sell its Kam division’s assets early in Year 2. On that date, Wand estimated that the fair value of the component’s assets was $25,000 less than the carrying value. Wand also estimated that Kam would incur operating losses of $100,000 for the period of October 1, Year 1 through December 31, Year 1 and $50,000 for the period January 1, Year 2 through February 28, Year 2. All estimates proved to be materially correct. Disregarding income taxes, what should Wand report as loss from discontinued operations in its comparative Year 1 and Year 2 income statements?

Correct Answer is:

Year 1: 125,000.

Year 2: 50,000.

I understand the Year 1 part, but why is Year 2 125,000? $100,000 is only the operating losses from Oct 1 through December. Are we assuming that there are no losses from Jan 1 to Oct1?

Thank you so much! (First time posting on Another71. Woohoo! Oh, and Good Luck everyone! 🙂

[Anonymous]

Sorry, I mean't why is year 1 $125,000?

[Anonymous]

I'm just scanning this at work…but it looks like you are assuming Year 1 loss is just the loss from operation, and are questioning why they have the additional $25k included…and/or where it is coming from. The $25k is the estimated loss on sale of the assets, since it is assumed that they will sell the assets at or around fair value, and fair value is $25k less than carrying value. Why do they count that loss now? Well…because the ability to count things as book value and depreciate them is based on the going concern assumption, which says that we expect this business (or this segment) to still be here long enough to fully use up the asset. (That's not the exact definition, but close enough in this situation!) Once they decide to sell the business segment, it's no longer a going concern – they no longer expect to be operating it for the full useful life of their assets. So they need to recognize a loss for the difference between the carrying value and the actual value.

The loss due to FV being less than carrying value is called an impairment loss and is recognized in the example in the amount of $1.8m.

By the way, welcome to posting on A71! 🙂 I'm still fairly early in my journey (only have one score back so far…), but I've already really grown to appreciate this community!

[sbarkerACPA]

Yr 1: Impairment loss 25,000 + operating loss $100,000 = $125,000

BEC: 74;81
AUD: 77
REG: 71; 80
FAR: 78
License for CPA----APPROVED
CPA Class of 2013

[Anonymous]

Thank you for the excellent explanations Elisabeth and sbarkerACPA! I understand the additional 25K part, but because no operating loss was given from Jan 1 to Oct 1, I thought that there was something wrong with the question. I should have realized that the question implied that there was no loss from Jan 1 to Oct 1.

Also, thank you for welcoming me! 🙂

[Anonymous]

Oh I see what the question/concern was. 🙂 Actually, I think that it only counts as “loss from discontinued operations” after the company decides to sell it, which was Oct 1. So, there was probably was a loss from Jan 1 – Oct 1, but that loss was a loss from (at the time) continuing operations.

[Author]

Replies