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Financial Accounting and

Reporting
Presented by Liz Kolar, MBA, CPA, CGMA

©Surgent • www.surgent.com
Discontinued Operations and
Exit/Disposal Activities
Discontinued Operations

• Discontinued Operations: a company eliminates


the results of operations and cash flows of a
component
• There is no significant continuing involvement in
that component
• Amount reported “net of tax”

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Discontinued Operations

• A component of an entity is
– segment,
– reporting unit,
– or asset group (not a part of a line of business)
– whose operations and cash flows are clearly
distinguished from the rest of the entity, operationally as
well as for financial reporting purposes

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Discontinued Operations Example

• Kentucky Corporation had after tax income from


continuing operations of $55,000 for the year.
During the year, it disposed of its restaurant
division at a pretax loss of $2700. Prior to
disposal, the division operated at a pretax loss of
$4,500 for the year. Assume a tax rate of 30%.
Prepare a partial income statement for Kentucky.

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Discontinued Operations Example

Income from continuing operations $55,000


Discontinued operations:
Loss from operations (net of $1,350 tax) $3,150
Loss on disposal (net of $810 tax) 1,890
Total loss on discontinued operations 5,040
Net income $49,960

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Exit/Disposal Activities

• Exit activities include:


– Termination benefits provided to current employees
that are involuntarily terminated
– Costs to terminate a contract that is not a capital
lease
– Costs to consolidate facilities and/or relocate
employees

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Exit/Disposal Costs

• A liability for an exit/disposal cost should be


recognized at fair value when the entity has little
or no discretion to avoid the future transfer or
use of assets to settle the liability
– Any changes in the liability should be measured using
the credit-adjusted risk-free rate that was used to
measure the liability initially
• Exit/disposal costs are included in income from
continuing operations

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Question # 1

On October 1, year 3, Washington Inc. committed itself to


a formal plan to sell its Lincoln division’s assets.
Washington estimated that the loss from the disposal of
assets in February of year 4 would be $25,000.
Washington also estimated that Lincoln would incur
operating losses of $100,000 for the period of October 1
through December 31, year 3, and $50,000 for the period
January 1 through February 28, year 4. These estimates
were materially correct.

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Question # 1 continued

Disregarding income taxes, what should Washington report


as loss from discontinued operations in its comparative
year 3 and year 4 income statements?
Year 3 Year 4
A. $175,000 $0
B. $125,000 $ 50,000
C. $100,000 $ 75,000
D. $0 $175,000

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Question # 1

On October 1, year 3, Washington Inc. committed itself to


a formal plan to sell its Lincoln division’s assets.
Washington estimated that the loss from the disposal of
assets in February of year 4 would be $25,000.
Washington also estimated that Lincoln would incur
operating losses of $100,000 for the period of October 1
through December 31, year 3, and $50,000 for the period
January 1 through February 28, year 4. These estimates
were materially correct.

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Question # 1 Solution

Disregarding income taxes, what should Washington report


as loss from discontinued operations in its comparative
year 3 and year 4 income statements?
Year 3 Year 4
A. $175,000 $0
B. $125,000 $ 50,000
C. $100,000 $ 75,000
D. $0 $175,000

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Question # 2
On February 2, year 9, Finkel Corp.’s BODs voted to
discontinue operations of its frozen food division and to sell
the division’s assets on the open market as soon as possible.
The division reported net operating losses of $20,000 in
January and $30,000 in February. On February 26, year 9,
sale of the division’s assets resulted in a gain of $90,000.
What amount of gain from disposal of a business segment
should Finkel recognize in its income statement for the three
months ended March 31, year 9?
A. $10,000
B. $40,000
C. $60,000
D. $90,000
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Question # 2 Solution

Gain on sale $90,000


Net operating losses (50,000)
Net gain on disposal $40,000

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Question # 2 Solution
What amount of gain from disposal of a business segment
should Finkel recognize in its income statement for the three
months ended March 31, year 9?
A. $10,000
B. $40,000
C. $60,000
D. $90,000

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Questions # 3 and # 4
Use the following information for Questions 3 and 4:

On December 31 of the current year, the BODs of Maple


Manufacturing Inc. committed to a plan to discontinue the
operations of its Apple division in the following year. Maple
estimated that Apple following year operating loss would be
$500,000 and that Apple’s facilities would be sold for
$300,000 less than their carrying amounts. Apple’s current
year operating loss was $1,400,000, before any consideration
of impairment loss. Maple’s effective tax rate is 30%. These
estimates were accurate.

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Question # 3

In its current year income statement, what amount should


Maple report as loss from discontinued operations?
A. $1,190,000
B. $1,400,000
C. $1,540,000
D. $2,300,000

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Question # 3 Solution

Current operating loss $1,400,000


Estimated Loss on Disposal 300,000
Total 1,700,000
Less 30% tax (510,000)
Net $1,190,000

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Question # 3 Solution

In its current year income statement, what amount should


Maple report as loss from discontinued operations?
A. $1,190,000
B. $1,400,000
C. $1,540,000
D. $2,300,000

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Question # 4

In its following year income statement, what amount should


Maple report as loss from discontinued operations?
A. $350,000
B. $500,000
C. $560,000
D. $880,000

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Question # 4 Solution

Following year loss $500,000


Net of 30% Tax (150,000)
Loss $350,000

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Question # 4 Solution

In its following year income statement, what amount should


Maple report as loss from discontinued operations?
A. $350,000
B. $500,000
C. $560,000
D. $880,000

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Question # 5

Which of the following transactions qualify as a


discontinued operation?
A. Disposal of part of a line of business
B. Planned and approved sale of a segment
C. Phasing out of a production line
D. Changes related to technological improvements

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Question # 5 Solution

• A component of an entity is
– segment,
– reporting unit,
– or asset group (not a part of a line of business)
– whose operations and cash flows are clearly
distinguished from the rest of the entity, operationally as
well as for financial reporting purposes

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Question # 5 Solution

Which of the following transactions qualify as a


discontinued operation?
A. Disposal of part of a line of business
B. Planned and approved sale of a segment
C. Phasing out of a production line
D. Changes related to technological improvements

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Thank you!