ADDITIONAL CLASSROOM EXERCISES ON NON-CURRENT ASSET

HELD FOR SALE AND DISCONTINUED OPERATIONS

Problem 1 – Identifying discontinued operations

Determine if the following activities are discontinued operations. All companies have their financial year–end at
December 31. Explain your answers.

(a) ROMANS Company has three product groups which are reported as separate segments: baby’s clothes, baby dolls,
and office equipment. In June 2020, management decided to dispose of its baby doll segment. In mid–September,
management announced its plan to dispose of the baby doll segment, which has become unprofitable and costly to
maintain.

(b) CORINTHIANS Company has four segments: soft drinks, ice cream, real estate, and insurance. Management has
decided to discontinue producing ice cream containing nuts. Instead, it will add ice cream containing fruits to its
assortment.

(c) The processed meat division, one of the segments of GALATIANS Corporation, has been operating at a loss since
2013. In 2020, the board of directors has been discussing during several of its meetings whether to dispose of this
segment. The board cannot agree whether to continue the segment’s activities. In its October 2020 board meeting,
the board members finally agreed to dispose of at least some of the facilities within the processed meat division in
the remaining quarter of the year. In 2021, some other facilities within the segment would probably be disposed of.

(d) In September 2020, the management of EPHESIANS Company decided to close one of its three facilities in the
United States as it is much cheaper to produce its products in the Philippines. The facilities are included in the
cosmetics segment together with the facilities in the United States, Spain, and the Philippines. Management has
already formalized the plan and informed its employees of its decision.

(e) COLOSSIANS Inc. has four different business segments. One of the segments is producing desiccated coconut
candies. The factories where these candies are produced are located in fields where the coconut trees are grown.
These are situated in Southern Luzon. In November 2020, management decided to dispose of this segment and
worked out a detailed plan for the disposal. Management announced its plan to the press after its January 2021
board meeting.

Problem 2 – Presentation of discontinued operations

Presented below are the condensed income statements of PHILIPPIANS Corporation for the years ended December 31,
2019 and 2020.
2020 2019
Sales P 10,000,000 P 9,800,000
Cost of goods sold (6,700,000) (6,600,000)
Gross income 3,300,000 3,200,000
Operating expenses (1,350,000) (1,300,000)
Operating income 1,950,000 1,900,000
Gain on sale of division 400,000 0
Income before tax 2,350,000 1,900,000
Income tax expense (35%) (822,500) (665,000)
Net income P 1,527,500 P 1,235,000
On October 10, 2020, the firm entered into an agreement to sell the assets of one of its geographical segments. The
geographical segment comprises operations and cash flows that can be clearly distinguished operationally and for
financial reporting purposes, from the other sections/parts of the company.

The segment was sold on December 31, 2020 for P3,500,000. The book value of the segment’s assets was P3,100,000.
The segment’s contribution to PHILIPPIANS’ operating income before tax for each year was as follows:

2020 (P227,500)
2019 162,500

Based on the above data, calculate the following:

(a) Income net of tax from continuing operations in 2019.
(b) Income net of tax from continuing operations in 2020.
(c) Net income after tax in 2019.
(d) Net income after tax in 2020.
(e) Assume that by December 31, 2020, the segment had not yet been sold but was considered held for sale. The fair
value of the segment’s asset on December 31 was P3,500,000. How much should be the post-tax income (loss)
from discontinued operations for 2020?
(f) Assume that by December 31, 2020, the segment had not yet been sold but was considered held for sale. The fair
value of the segment’s assets on December 31, 2020 was P2,500,000. How much should be the post-tax income
(loss) from discontinued operations for 2020?

October 2020