[Pangsar]

Hi guys,

I’m going over the Ninja MCQ’s and I’m having trouble with this one about when to recognize gains/losses from discontinued operations:

Munn Corp.’s income statements for the years ended December 31, 20X2 and 20X1, included the following, before adjustments:

20X2 20X1

Operating income $ 800,000 $600,000
Gain on sale of division 450,000 —
———- ——–
1,250,000 600,000
Provision for income taxes 375,000 180,000
———- ——–
Net income $ 875,000 $420,000
========== ========

On January 1, 20X2, in a strategic shift, Munn agreed to sell the assets and product line of one its operating divisions for $1,600,000. The sale was consummated on December 31, 20X2, and resulted in a gain on disposition of $450,000. This division’s pretax losses were $320,000 in 20X2 and $250,000 in 20X1. The income tax rate for both years was 30%. In preparing revised comparative income statements, assuming that the division qualified as a component, Munn should report which of the following amounts of gain (loss) from discontinued operations?

A. 20X2: $130,000; 20X1: $0
B. 20X2: $130,000; 20X1: $(250,000)
C. 20X2: $91,000; 20X1: $0
D. 20X2: $91,000; 20X1: $(175,000)

I chose answer C because the company made the decision to sell the division in year 2, so there shouldn’t be any loss in discontinued operations in year 1, but the answer is D. The amount of discontinued operations gain/loss for year 2 I understood, but I don’t understand why year 1 losses should count as discontinued? The question explicitly states that the decision was made in year 2 and not year 1, so 20X1 discontinued loss should be $0…

Any help or insight is appreciated! Also sorry for the bad formatting..

[HDCPA]

The loss in year 1 is reported as a loss from discontinued operations because the strategic shift to sell the division was decided on 1/1. This is in the timeframe included for subsequent events, and since it’s major it should be reflected in discontinued operations.

[Pangsar]

Thanks for the insight! However, I thought subsequent events were only accrued if conditions relevant to the subsequent event existed before the date of the financial statements? The question doesn't mention anything about the conditions relating do the discontinued op existing in year 1, so shouldn't the there only be a disclosure?

Thanks!

[Author]

Replies