[Anonymous]

Can someone please explain how the additional loss of $100,000 is calculated from the example below? Seems like its from the sold price of $400,000 less than carrying amount – 300,000 impairment loss. Can someone please confirm.

On December 31, Year 1, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. The decision represents a major strategic shift and will have a significant effect on its operations and financial results. Maxy estimated that Alpha’s Year 2 operating loss would be $500,000 and that the fair value of Alpha’s facilities was $300,000 less than their carrying amounts. The estimate for Year 2 turned out to be correct. Alpha’s Year 1 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount. Maxy’s effective tax rate is 30%.

In its Year 2 income statement, what amount should Maxy report as loss from discontinued operations?

a.$420,000

b.$350,000

c.$500,000

d.$600,000

Explanation

Choice “a” is correct. The Year 2 loss from discontinued operations would include both the Year 2 operating loss of $500,000 (which turned out to be a correct estimate) and the “additional” loss (on disposal) of $100,000, net of tax, for a total of $600,000 x 0.70 or $420,000.

Choice “b” is incorrect. It includes the Year 2 operating loss of $500,000 but not the $300,000 impairment loss but does report the Year 2 operating loss net of tax.

Choice “c” is incorrect. It includes the Year 2 operating loss of $500,000, but not the $100,000 loss on disposal, and reports the Year 2 operating loss gross of tax and not net of tax.

Choice “d” is incorrect. It reports the Year 2 loss from discontinued operations gross of tax and not net of tax. The Year 2 loss from discontinued operations should include both the Year 2 operating loss of $500,000 and the loss on disposal of $100,000, net of tax, for a total of $600,000 x 0.70 or $420,000.

[marqzho]

In year 1, you estimate there is a impairment loss of $300. you book that amount in I/S for year 1

In Year 2, $400 loss is the actually loss from the sales. Since you already book $300 in year 1, you then book $100 loss in year 2 plus $500 operating loss which I think you have no problem on it 🙂

So (100+500 )*.7 = 420

REG 90
FAR 95
AUD 98
BEC 84

[Anonymous]

thanks @marqzho

[Anonymous]

I am confused still on this question. I thought you book the loss in the year of disposal (year 2) not in year 1. Can someone please help me with this?

[MeanJoe]

There are three steps to a discontinued operations.

1. Operating loss for the year management decided to cease operations (major strategic shift) – even if decided on the last day of the year all of the losses for the segment are included going back to 1-1 of that year. – Loss is recognized on the I/S in the year management decides to cease operations
2. Impairment loss when FV is less than CV – Loss is recognized on the I/S in the year management decides to cease operations

3. Operating loss up until the segment is sold in the subsequent year + any further loss due to selling price – Loss is recognized on I/S in year the segment is actually sold.

All losses are net of tax on the income statement.

[Author]

Replies