CHAPTER 7

DISCONTINUED OPERATION

Problem 7-1 (IFRS)

On September 30, 2018, when the carrying amount of the net assets of a business segment was
P70,000,000, Young company signed a legally binding contract to sell the business segment.

The sale is expected to be completed by January 31, 2019 at a sale price of P60,000,000.

In addition, prior to January 31, 2019, the sale contract obliged Young company to terminate the
employment of certain employees of the business segment incurring an expected termination
cost of P5,000,000 to be paid on June 30, 2019

The segment revenue and expenses for 2018 were P40,000,000 and P45,000,000 respectively.
The income tax rate is 30%.

What amount should be reported as loss from discontinued operation for 2018?
a.14,000,000
b.20,000,000
c.15,000,000
d.10,500,000

Solution 7-1 Answer a

Revenue 40,000,000
Expenses (45,000,000)
Impairment loss (10,000,000)
Termination cost (5,000,000)
Loss from discontinued operation (20,000,000)
Tax effect (30% x 20,000,000) 6,000,000
Net loss from discontinued operation 14,000,000

Selling price 60,000,000

Carrying amount (70,000,000)
Impairment loss (10,000,000)

Problem 7-2 (IFRS)

Xavier Company has three segments A, B and C. Segment C, the closing division, is deemed with
long term direction of the entity. Management has decided to dispose of segment C.

On November 15, 2018, the board of directors of Xavier Company voted to approve the disposal
and an announcement was made.

On that date the carrying amount of Segment C’s net assets was P90,000,000 and the fair value
less cost of disposal was P70,000,000.
Segment C’s revenue and expenses for 2018, respectively, were P50,000,000 and P45,000,000,
including an interest of P5,000,000 attributable to Segment C.

There was no further impairment of assets between November 15 and December 31, 201. The
income tax rate is 30%.

What is the amount of loss from discontinued operations should be reported for 2018?
a.15,000,000
b.10,500,000
c. 7,000,000
d. 5,000,000

Solution 7-2 Answer b

Revenue 50,000,000
Expenses (45,000,000)
Impairment loss
(20,000,000)
Loss from discontinued operation (15,000,000)

Loss after tax (15,000,000 x 70%) 10,500,000

Carrying amount 90,000,000

Fair value less cost of disposal 70,000,000
Impairment loss 20,000,000

Problem 7-3 (IFRS)

Zebra Company is a diversified entity with nationwide interests in commercial real estate
development, banking, mining and food distribution. The food distribution was deemed to be
inconsistent with the long term direction of the entity.

On October 1, 2018 the board of directors voted to approve the disposal of this division. The
sale is expected to occur in August 2019

The food distribution had revenue P35,000,000 and expenses of P27,000,000 for the period of
January 1 to September 30, and revenue of P15,000,000 and expenses of P10,000,000 for the
period of October 1 to December 31.

The carrying amount of the division’s net assets on December 31,2018 was P55,000,000 and the
fair value less cost of disposal was P60,000,0000.

The sale contract required Zebra to terminate certain employees incurring an expected
termination cost of P4,000,000 to be paid by December 15,2019. The income tax rate is 30%.
What amount should be reported as income from discontinued operation for 2018?
a. 7,700,000
b. 8,300,000
c. 9,000,000
d. 6,300,000

Solution 7-3 Answer d

Revenue – January 1 to December 31 50,000,000
Expenses – January 1 to December 31 ( 37,000,000)
Termination cost (4,000,000)
Income before tax 9,000,000
Income tax(30% x 9,000,000) 2,700,000
Income from discontinued operation 6,300,000
Fair value less cost of disposal 60,000,000
Carrying amount of net assets 55,000,000
Expected gain - not recognized 5,000,000

Problem 7-4(IAA)

Booker Company committed to sell the comic book division, a component of the business, on
September 1,2018.

The carrying amount of the division was P4,000,000 and the fair value was P3,500,000.

The disposal date is expected on June 1,2019. The division reported an operating loss of
P200,000 for the year ended December 31,2018.

What amount should be reported as pre-tax loss from discontinued operation in 2018?
a. 500,000
b. 200,000
c. 700,000
d.0

Solution 7-4 Answer c

Operating loss for the year 200,000

Impairment loss(4,000,000-3,500,000) 500,000
Loss from discontinued operation 700,000

Problem 7-5 (IAA)

Enron company decided on August 1,2018 to dispose of a component of business. The

component was sold on November 30,2018.
The net income for the current year included income of P5,000,000 from operating the
discontinued segment from January 1 to the date of disposal. The entity incurred a loss on the
November 30 sale of P4,500,000.

What amount should be recorded as a pre-tax income or loss from discontinued operation for
2018?
a. 4,500,000 loss
b. 5,000,000 income
c. 500,000 loss
d. 500,000 income

Solution 7-5 Answer d

Operating income of discontinued segment 5,000,000
Loss on Disposal (4,500,000)
Income from discontinued operation 500,000

Problem 7-6 (IAA)

Vernon Company had two operating divisions, one manufacturing farm equipment and the
other office supplies. Both divisions are considered separate components.

The farm equipment component had been unprofitable and on September 1,2018, the entity
adapted a plan to sell the assets of the division.

The actual sale was effected on December 15, 2018 at a price of P3,000,000. The carrying
amount of the division’s asset was P5,000,000.

The division incurred before-tax operating loss of P1,500,000 from the beginning of the year
through December 15, 2018.

The entity after tax income from continuing operations is P9,000,000. The income tax rate is
30%.

What amount should be reported as net income for the current year?
a. 5,500,000
b. 6,550,000
c. 6,300,000
d. 7,600,000

Solution 7-6 Answer b

Income from continuing operations 9,000,000
Loss from discontinued operation (2,450,000)
Net income 6,550,000
Sale price of division assets 3,000,000
Carrying amount of assets 5,000,000
Loss on disposal (2,000,000)
Division operating loss (1,500,000)
Total loss from discontinued operation (3,500,000)
Loss after tax(3,500,000 x 70%) (2,450,000)

Problem 7-7 (AICPA Adapted)

Dublin Company had two operating divisions, one manufactures machinery and the other
breeds and sells horses. Both divisions are considered separate components.

The horse division has been unprofitable and on November 15,2018, the entity adopted a
formal plan to sell the division. At December 31, 2018, the component was considered held for
sale.

The sale was completed on April 30, 2019.

On December 31, 2018, the carrying amount of the assets of the horse division was P5,000,000.
On that date, the fair value less cost of disposal was P4,000,000.

The before tax operating loss of the division for the year was P2,000,000.

The after tax income from continuing operations for 2018 was P8,000,000. The income tax rate
is 30%.

What is the net income for 2018?

a. 4,500,000
b. 5,600,000
c. 3,850,000
d. 6,250,000

Solution 7-7 Answer d

Income from continuing operations 8,000,000
Loss from discontinued operation (1,750,000)
Net income 6,250,000
Fair value of asset of division 4,000,000
Carrying amount of assets 5,000,000
Impairment loss (1,000,000)
Operating loss of division (1,500,000)
Total loss (2,500,000)
Tax effect (30% x 2,500,000) 750,000
Loss from discontinued operation (1,750,000)
Problem 7-8 (IAA)
In 2018, Isuzu Company decided to discontinue the Electronics Division, a separately identifiable
component of Isuzu’s business. On December 31, 2018, the division had not been completely
sold.

However, negotiations for the final and complete sale are progressing in a positive manner and
is probable that the disposal will be completed within a year.

Analysis of the records for the year disclosed the following relative to the Electronic Division:

Operating loss for the current year 8,000,000

Loss on disposal of some Electronic Division assets during 2018 500,000
Expected operating loss in 2019 preceding final disposal 1,000,000
Expected gain in 2019 on disposal of division 2,000,000

What amount should be reported as pre-tax loss from discontinued operation in 2018?
a. 8,000,000
b. 8,500,000
c. 9,500,000
d. 7,500,000

Solution 7-8 Answer b

Operating loss for the current year 8,000,000
Loss on disposal in 2018 500,000
Pre-tax loss from discontinued operation 8,500,000

The expected operating loss in 2018 and expected gain on disposal in 2019 are not recognized in
2018.

Problem 7-9 (AICPA Adapted)

On December 31, 2018, Max Company committed to a plan to discontinue the operations of
Underwear Division.
The fair value of the facilities was P1,000,000 less than carrying amount on December 31, 2018.

The division’s operating loss for 2018 was P2,000,000 and the division was actually sold for
P1,200,000 les than the carrying amount in 2019.

The entity estimated that the division’s operating loss for 2019 would be P500,000.

What amount should be reported as pre-tax loss from discontinued operations in 2018?
a. 3,000,000
b. 2,000,000
c. 1,000,000
d. 3,200,000

Solution 7-9 Answer a

Operating loss in 2018 2,000,000
Impairment loss in 2018 1,000,000
Loss from discontinued operation 3,000,000

Problem 7-10 (IAA)

Flame company has two divisions, North and South. Both qualify as business components.

In 2018, the entity decided to dispose of the assets and liabilities of division South and its
probable that the disposal will be completed early next year.

The revenue and expenses of Flame Company are as follows:

2018 2017
Sales North 5,000,000 4,600,000
Total non-tax expenses – North 4,400,000 4,100,000
Sales South 3,500,000 5,100,000
Total non-tax expenses – South 3,900,000 4,500,000

During the later part of 2018, the entity disposed of a portion of division South and recognized a
pre-tax loss of P2,000,000 on the disposal.

What amount should be reported as pre-tax loss from discontinued operations in 2018?
a. 2,000,000
b. 2,400,000
c. 1,400,000
d. 1,600,000

Solution 7-10 Answer b

Sales – South 3,500,000
Expenses – South 3,900,000
Operating loss (400,000)
Loss on disposal (2,000,000)
Total loss (2,400,000)

Problem 7-11 (IAA)

Jazz Company operates two restaurants, one in Boracay and one in Dakak. The operations and
cash flows of each of the two restaurants are clearly distinguishable.
During 2018, the entity decided to close the restaurant in Dakak and sell the property. It is
probable that the disposal will be completed early next year.
The revenue and expenses for 2018 and the preceding two years are as follows:

2018 2017 2016

Sales – Boracay 60,000 48,000 40,000
Cost of good sold –Boracay 26,000 22,000 18,000
Other expenses – Boracay 14,000 13,000 12,000
Sales – Dakak 23,000 30,000 52,000
Cost of goods sold – Dakak 14,000 19,000 20,000
Other expenses – Dakak 17,000 16,000 15,000

The other expenses do not include income tax expense. During the later part of 2018, the entity
sold some of the kitchen equipment of the Dakak restaurant and recognized a pre-tax gain of
P15,000 on the disposal.

What amount should be reported as pre-tax income or loss from discontinued operation for
2018?
a. 8,000 loss
b. 7,000 gain
c. 5,000 loss
d. 1,000 gain

Solution 7-11 Answer b

Sales – Dakak 23,000
Cost of goods sold – Dakak (14,000)
Other Expenses – Dakak (17,000)
Gain on disposal 15,000
Income from discontinued operation before tax 7,000

Problem 7-12 (IFRS)

Marquee Company, a present entity, approved on December 1,2018 a plan to sell a subsidiary.
The sale is expected to be completed on March 31, 2019.

The year – end is December 31, 2018 and the financial statements were approved on March 1,
2019.

The subsidiary had assets with carrying amount of P15,000,000 including goodwill of P1,500,000
on December 31, 2018.

The subsidiary made a loss of P3,000,000 from January 1 to March 1, 2019 and is expected to
made a further loss of P2,000,000 up to the date of sale.
At the date of approval of the financial statements, the entity was in negotiation for the sales of
the subsidiary but no contract had been signed.

The entity expected to sell the subsidiary for 9,000,000 and to incur cost of disposal of
P500,000.

The value in use of the subsidiary was estimated to be P10,000,000.

On December 31, 2018, what is the measurement of the subsidiary which is considered as a
disposal group classified as held for sale?
a. 15,000,000
b. 10,000,000
c. 9,000,000
d. 8,500,000

Solution 7-12 Answer d

Carrying amount 15,000,000
Fair value 9,000,000
Cost of disposal 500,000
Fair value less cost of disposal 8,500,000

A non – current asset or disposal group classified as held for sale shall be measure at the lower
of carrying amount and fair value less cost of disposal. The value in use is ignored.