ExpertHard1 markMultiple Choice
CPA · Question 08 · Area I: Financial Reporting
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. <br/><br/>The component had an operating loss of $300,000 from Jan 1 to Dec 31, Year 1. The tax rate is 25%. <br/><br/>What amount should Prism report as 'Loss from Discontinued Operations' in its Year 1 Income Statement?
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. <br/><br/>The component had an operating loss of $300,000 from Jan 1 to Dec 31, Year 1. The tax rate is 25%. <br/><br/>What amount should Prism report as 'Loss from Discontinued Operations' in its Year 1 Income Statement?
Answer options:
A.
$825,000
B.
$1,100,000
C.
$825,000
D.
$600,000
How to approach this question
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).
Full Answer
C.$825,000✓ Correct
1. **Operating Loss:** $300,000 (Jan 1 - Dec 31).<br/>2. **Impairment Loss:** <br/> Carrying Value: $4,000,000<br/> FV less costs to sell: $3,200,000<br/> Loss = $800,000.<br/>3. **Total Pre-tax Loss:** $300,000 + $800,000 = $1,100,000.<br/>4. **Net of Tax:** $1,100,000 * (1 - 0.25) = $825,000.
Common mistakes
Forgetting to tax effect; forgetting the impairment loss; only counting operating loss from the date of decision (it should be the whole period).
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