Question 1

On October 1, Year 1, Host Co. approved a plan to dispose of a component of its business. The disposal meets the criteria for discontinued operations. The component was sold on January 15, Year 2.
For the year ended December 31, Year 1, the component had:
- Operating loss (pre-tax): $300,000
- Estimated costs to sell: $50,000
- Carrying amount of net assets: $2,000,000
- Fair value of net assets: $1,600,000

The effective tax rate is 25%. What amount should Host report as the Loss from Discontinued Operations in its Year 1 Income Statement?

Accepted Answer

Discontinued operations are reported net of tax. The loss includes 1) Operating loss for the period, and 2) Impairment loss if the Fair Value less Costs to Sell is lower than the Carrying Amount (Held for Sale measurement).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting to deduct costs to sell from fair value; forgetting to apply the tax rate; omitting the impairment loss entirely.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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