ExpertHard1 markMultiple Choice
CPA · Question 02 · Area I: Financial Reporting
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. <br/>For the year ended December 31, Year 1, the component had:<br/>- Operating loss (pre-tax): $300,000<br/>- Estimated costs to sell: $50,000<br/>- Carrying amount of net assets: $2,000,000<br/>- Fair value of net assets: $1,600,000<br/><br/>The effective 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. 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. <br/>For the year ended December 31, Year 1, the component had:<br/>- Operating loss (pre-tax): $300,000<br/>- Estimated costs to sell: $50,000<br/>- Carrying amount of net assets: $2,000,000<br/>- Fair value of net assets: $1,600,000<br/><br/>The effective tax rate is 25%. What amount should Host report as the Loss from Discontinued Operations in its Year 1 Income Statement?
Answer options:
A.
$525,000
B.
$700,000
C.
$562,500
D.
$225,000
How to approach this question
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).
Full Answer
C.$562,500✓ Correct
1. Operating Loss: $300,000.<br/>2. Impairment Loss (Held for Sale measurement): Carrying Value ($2,000,000) vs. Fair Value less Costs to Sell ($1,600,000 - $50,000 = $1,550,000). The asset is written down by $450,000.<br/>3. Total Pre-tax Loss = $300,000 + $450,000 = $750,000.<br/>4. Net of Tax Loss = $750,000 × (1 - 0.25) = $562,500.
Common mistakes
Forgetting to deduct costs to sell from fair value; forgetting to apply the tax rate; omitting the impairment loss entirely.
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