ExpertHard1 markMultiple Choice
CPA · Question 12 · Area I: Financial Reporting
On October 1, Year 1, Gamma Corp. committed to a plan to sell a component of the entity that represents a strategic shift. The component was sold on January 15, Year 2. For the year ended December 31, Year 1, the component had an operating loss of $100,000. The carrying value of the component was $2,000,000 and its fair value less costs to sell was $1,800,000. The tax rate is 25%. What amount should be reported as Discontinued Operations in the Year 1 Income Statement?
On October 1, Year 1, Gamma Corp. committed to a plan to sell a component of the entity that represents a strategic shift. The component was sold on January 15, Year 2. For the year ended December 31, Year 1, the component had an operating loss of $100,000. The carrying value of the component was $2,000,000 and its fair value less costs to sell was $1,800,000. The tax rate is 25%. What amount should be reported as Discontinued Operations in the Year 1 Income Statement?
Answer options:
A.
$100,000 loss
B.
$300,000 loss
C.
$225,000 loss
D.
$75,000 loss
How to approach this question
1. Identify Operating Loss ($100k). 2. Identify Impairment Loss (Carrying Value $2M - FV $1.8M = $200k). 3. Sum losses ($300k). 4. Apply tax rate (net of tax).
Full Answer
C.$225,000 loss✓ Correct
The component is Held for Sale at Dec 31. It must be measured at the lower of carrying amount or fair value less costs to sell.<br/>Impairment Loss = $2,000,000 - $1,800,000 = $200,000.<br/>Operating Loss = $100,000.<br/>Total Pre-tax Loss = $300,000.<br/>Net of Tax Loss = $300,000 * (1 - 0.25) = $225,000.
Common mistakes
Forgetting the impairment loss; forgetting to apply tax; applying tax only to one part.
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