ExpertHard1 markMultiple Choice
CPA · Question 2 · Area 1: Financial Reporting
On October 1, Year 1, Host Co. committed to a plan to dispose of a major component of its business that qualifies as a discontinued operation. The sale is expected to occur on March 1, Year 2. For the year ended December 31, Year 1, the component had an operating loss of $300,000. The estimated fair value of the component is $1,500,000, and its carrying amount is $1,800,000. Estimated costs to sell are $50,000. The corporate tax rate is 25%. What amount should Host report as the loss from discontinued operations in its Year 1 income statement?
On October 1, Year 1, Host Co. committed to a plan to dispose of a major component of its business that qualifies as a discontinued operation. The sale is expected to occur on March 1, Year 2. For the year ended December 31, Year 1, the component had an operating loss of $300,000. The estimated fair value of the component is $1,500,000, and its carrying amount is $1,800,000. Estimated costs to sell are $50,000. The corporate tax rate is 25%. What amount should Host report as the loss from discontinued operations in its Year 1 income statement?
Answer options:
A.
$487,500
B.
$650,000
C.
$487,500
D.
$225,000
How to approach this question
1. Calculate Operating Loss for the period. 2. Calculate Impairment Loss (Carrying Value vs. FV less costs to sell). 3. Sum them. 4. Apply tax rate (net of tax).
Full Answer
C.$487,500✓ Correct
C
Discontinued operations are reported net of tax. The loss consists of the operating loss for the year ($300,000) plus the impairment loss recognized upon classification as held for sale. Impairment = Carrying Value ($1,800,000) - Net Realizable Value ($1,500,000 - $50,000) = $350,000. Total pre-tax loss = $650,000. After 25% tax benefit, the reported loss is $487,500.
Common mistakes
Forgetting to deduct costs to sell from FV; forgetting to apply tax rate; ignoring the impairment loss.
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