Discontinued Operations Flashcards
An entity is reporting discontinued operations at the bottom of its income statement. How does the entity determine this income figure?
The income figure shown as discontinued operations includes all of the operations results of this particular group of assets for the current reporting period. In addition, any gain or loss on disposal of these assets is also recognized. The reported figure is shown net of any applicable tax effect.
An entity is holding a group of assets that are to be sold. These assets qualify as a discontinued operation. When is the gain or loss on the sale to be recognized?
As soon as a group of assets qualify as being held for resale purposes, the group should be reported at the lower of book value or net realizable value (FMV less the cost to sell) if the net realizable value is less, the write down occurs immediately, creating a recognized loss. Conversely, if the book value is less, no write down occurs, and the income effect is recognized when a sale takes place. A gain is only recognized up on the actual sale of the assets.
On Dec 31, year 1, and entity decides to sell an asset because it is losing $10,000 per month. The asset currently has a book value of $400,000, but they believe that it can be resold during Year 2 for $430,000. However, the entity will have to pay commission of $40,000 to dispose of this asset.
If this asset qualifies as a discontinued operation, and the tax rate is 40%, what is reported in Year 1’s income statement?
The entity’s $120,000 loss from operations must be reported (12 mos x $10,000 per month)
In addition, this group of assets has a $400,000 book value, but only a $390,000 realizable value($430,000-$40,000). Thus the assets should be immediately written down by $10,000 creating a loss.
The entity has a total loss on discontinued operations of $130,000 ($120,000 + $10,000). However the tax effect ($52,000 or $130,000 x 40%) reduces that reported figure to $78,000 on the income statement.
An entity has a group of assets that qualifies as a discontinued operation. The decision to sell these assets was made in Year 2, and the sale was finalized in Year 3. What is the impact on the income statement for Year 1 that had previously been issued?
There is no effect on previously issued an reported financial statements. However, with comparative financial statements are presented, the prior years’ statements are recast to reflect the effects of the discontinued operation. All revenues and expense related to this group of assets must be pulled out and dropped to the bottom of all past income statements and reported as a single number net of taxes. This handling does not change net income, but does provide for a better comparison from year to year because operating income is shown separately from discontinued operations for the current year, as well as all past years that are reported.
On the income statement, where is the amount for any discontinued operation located?
Discontinued operations appear at the very bottom of the income statement (net of its tax effect)
An entity sells (or abandons) a group of assets. How does the entity determine whether this group of assets qualifies as a discontinued operation?
When assets are sold or abandoned, these assets are classified as a discontinued operation if the operations and cash flows of those particular assets were clearly distinguished by the entity from the rest of the entity.
Therefore, what one entity might deem a discontinued operation might simply be recorded as a gain or loss on sale of assets by another, depending on the internal recording maintained by the entity.
