Question 1

On September 1, Year 1, Prism Inc. committed to a plan to sell a component that represents a strategic shift and qualifies as a discontinued operation. The carrying value of the component was $4,000,000. The fair value less costs to sell was $3,200,000.

The component had an operating loss of $300,000 from Jan 1 to Dec 31, Year 1. The tax rate is 25%.

What amount should Prism report as 'Loss from Discontinued Operations' in its Year 1 Income Statement?

Accepted Answer

1. Calculate Operating Loss for the full year. 2. Calculate Impairment Loss (Carrying Value - FV less costs to sell). 3. Sum them. 4. Apply tax rate (Net of Tax).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting to tax effect; forgetting the impairment loss; only counting operating loss from the date of decision (it should be the whole period).

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 5

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