Exit/Disposal Activities & Discountinued Operations

Question 1

What are the categories that capture the types of exit or disposal activitiess?

Answer 1

1. Occur in normal course of business that are disposals of individually insignifican assets
2. disposals that meet the criteria of discontiued operations
3. Significan disposals that do not meet criteria of discountinued operations

Question 2

What amount of disposal gain from a discounted operation is disclosed in the income statement?

Answer 2

The actual amount for the period

Question 3

Where is gain/loss on disposal shown?

Answer 3

In a separate line item in the DOP section of the income statement or netted against the discontinued component’s operating income with a footnote disclosure showing both

Question 4

List the two values to report for discontinued operations.

Answer 4

1. Income from discontinued operations

2. Gain or loss on disposal

Question 5

What is the amount of operating income from a discontinued operation that must be disclosed in the income statement?

Answer 5

the actual amount for the period

Question 6

Define “loss on disposal.”

Answer 6

Actual losses and estimated losses when book value > fair value less cost to sell

Question 7

Under International Financial Reporting Standards (IFRS), how are discontinued operations identified?

Answer 7

A component with operations that are a separate major line of business or geographical area, part of a coordinated plan to sell or and subsidiaries acquired with the intent to resell.

Question 8

Calculate a gain or loss on Exit or Disposal

Answer 8

Asset cost
-Accum Depr
= Asset net book value
-cash rcvd
=Gain or loss

Question 9

Examples of Strategic Shift

Answer 9

Disposal of

• Major Geographic area
• A line of buiness
• An equity method investment

Question 10

During 20x8, a firm discontinued a component qualifying for separate disclosure within the income statement. The disposal was completed before the end of 20x8 and resulted in a $300 disposal gain. The component earned $400 in 20x7 but lost $100 (negative income) in 20x8. The 20x7 income statement reported income from continuing operations (IFCO) of $6,000. The 20x8 income statement reported $7,000 of net income. Determine the following two amounts:

IFCO for 20x7 as it is reported comparatively in the 20x8 statements
IFCO for 20x8
$6,000

                                                   $7,000

$6,000

                                                         $6,800

$5,600

                                                         $6,800

$5,600

                                                            $7,200

Answer 10

$5,600 $6,800

The discontinued operations section of the income statement for prior periods shown comparatively separates the operating income of discontinued components from IFCO even though the decision had not yet been made in those earlier periods. This reporting results in improved comparability because each year reports IFCO on the same basis. (1) IFCO for 20x7, as it is reported comparatively in the 20x8 statements, reflects the removal of the $400 operating income for the segment and thus equals $6,000 − $400, or $5,600. (2) IFCO for 20x8 is computed by removing the effect of the disposal gain and operating loss from income. IFCO for 20x8 equals $7,000 net income − $300 disposal gain + $100 operating loss, or $6,800.

Question 11

In 20x5, a firm decided to discontinue a segment with a book value of $200 million and a fair value of $250 million. The cost to dispose of the segment in 20x6 is estimated to be $10 million. In the 20x5 income statement, what amount of disposal gain or loss will be reported in the discontinued operations section?

$ ‐0‐

$50 million loss.

$50 million gain.

$40 million gain.

Answer 11

$0

The estimated disposal gain is $240 [($250 − $10) proceeds] − $200 book value, or $40. Estimated disposal gains are not recognized, only estimated losses. Next year, the actual disposal gain will be recognized. Nonfinancial assets are not written up in value.

Question 12

Which of the following transactions qualify as a discontinued operation?

Disposal of a group of assets that are fully depreciated and have no remaining useful life.

Approved sale of a segment that represents a strategic shift in the entities operations.

Phasing out of a production line.

Changes related to technological improvements.

Answer 12

Approved sale of a segment that represents a strategic shift in the entities operations.

To qualify for a discontinued operation, the component to be disposed of must be approved as a sale and represents a strategic shift in the entity’s operations.

Question 13

On May 15, Year 1, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, Year 2, at a selling price of $500,000. The segment reported $195,000 in operating losses for Year 1. The segment is expected to lose $30,000 from operations in Year 2. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its Year 1 income statement?

$575,000

$225,000

$195,000

$545,000

Answer 13

$545,000

There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for Year 1.