CHAPTER 33 DISCONTINUED OPERATION PFRS 5 TECHNICAL KNOWLEDGE To understand the concept of a discontinued operation. To know the presentation of discontinued operation in the income statement. To know the presentation of discontinued operation in the statement of financial position. 524 Scanned with CamScannerCOMPONENT OF AN ENTITY 4 component of an entity is classified : . operation: ified as discontinued 2. When the entity has actually disposed of the operation. When the operation meets the criteria to be classified as held for sale. pFRS 5, paragraph 12, prohibits the retroactive lassification as a discontinued operation when the #iscontinued criteria are met after the end of reporting period. - ‘The discontinued operation is accounted for as.a "disposal group classified as held for sale." ‘The component of an entity must be available for immediate sale in the present condition and the sale must be highly probable. Examples of discontinued operation . Selling by a diversified entity of a major division that represents the entity's only activities in the electronics industry. b. Selling by a meat packing entity of controlling interest in a furniture entity. . All other operations of the entity are in the meat packing business. ‘ t. Selling by a communications entity of all its radio stations. The entity’s remaining activities are television stations and a publishing house. : d. A conglomerate is engaged in commodity business, real estate, manufacturing and construction business. Selling of any of the four businesses is a discontinued operation. , fee res eee f * 525° Scanned with CamScannerExamples which are not discontinued operation i | a. Phasing out of/product line within a product group | b, Shifting of production or marketing activities for a | particular line of b' iness from one location to another | c. Closing of a facility, fé tory or branch Income statement presentation shall be presented as a single amount in the inéome | | | The income or loss from discontinued operation, net of tax | | statement below the income from continuing operations. | ' } The income or loss on discontinued operation shall include the following: a. The amount of revenue, expenses and income or loss attributable to the discontinued operation. | b. An impairment loss when the fair value less cost of disposal of the discontinued operation is lower than i carrying amount of the assets. si | If the fair value less cost of disposal is higher than the carrying amount,’ the difference is not recognized. j c. Any gain or loss from the actual disposal of the assets. d. The termination cost of employees. Presentation in statement of financial position a. Assets of the discontinued operation are presented { separately as.a single amount under current assets. | b.. Assets of the discontinued operation are measured at the lower between fair value less cost of disposal and carrying amount. c._ Liabilities of the discontinued operation.are presented as'a single amount under current liabilities. . d. Noncurrent ‘assets of the discontinued operation shall not be depreciated. e. The assets and liabilities of the discontinued operation shall not be offset against the other. ; 526 Scanned with CamScanner{iustration geta Company has two segments, A and B. On duly 1, 2022, the board of directors of Zeta decided to dispose of Segment p, an apparel division. ¢ On October 1, 2022, Zeta Company signed a contract to sell segment B but the sale is expected to be completed by january 31,2023. < Qn December 31, 2022, the carrying amount of the assets of segment B was P3,000,000 and the fair value less cost of disposal of Segment B was P2,800,000. The sale contract required Zeta Company to terminate certain employees of Segment B. The expected termination cost is P150,000 to be paid on June 30, 2023. The accounting records. of Zeta Company showed the following information for 2022: Segment A Segment B Sales” ge 5,000,000. ' 3,000,000 Cost‘of goods sold 2,500,000 1,400,000 Expenses 700,000 ~~. . 500,000 Income tax " 450,000 200,000 527 Scanned with CamScanner‘Presentation ZETA COMPANY Income Statement Year ended December 31, 2022 Sales - Segment A Cost of goods sold Gross income Expenses Income before tax Income tax expense Income from continuing operations Income from discontinued operation, net of tax Net income Disclosure Sales -Segment B Cost of goods sold Gross income Expenses Impairment loss Employee termination cost Income tax Income from discontinued operation Fair value less cost of disposal Carrying amount of assets —- Segment B Impairment loss 5,000,000 (2,500,000) —e 2,500,000 700,000 1,800,000 (_ 450,000) 1,350,000 600,000 1,950,000 3,000,000 (1,400,000) 1,600,000 (500,000) (200,000) ( 100,000) (_ 200;000) 600,000 2,800,000 (3,000,000) (_ 200,000) Accounting for discontinued operation is discussed in detail in Intermediate Accounting Volume Three. 528 Scanned with CamScannerQUESTIONS 1 Define a discontinued operation. 9, Give examples of discontinued operation. 3. Explain the presentation of a discontinued operation in the income statement. 4, Explain the presentation of the assets a discontinued : te eration in the statement of financial position. 5, Explain the presentation of the liabilities of a discontinued operation in the statement of financial position. « 529 Scanned with CamScannerPROBLEMS Problem 33-1 (IFRS) On September 30, 2022, when the carrying amount of the 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, 2028 ata sale price of P60,000,000. In addition,the sale contract obliged’ Young Company to terminate the employment of certain employees of the business segment incurring an expected termination cost of P2,000,000 to be paid on dune 30, 2023. ’ The segment revenue and expenses for 2022 were P40,000,000 and P45,000,000 respectively. What amount should:be reported as pretax loss from discontinued operation for 2022? a. -17,000,000 b. 12,000,000 c. 15,000,000 d. 7,000,000 Problem 33-2 (IAA) Booker Company committed to sell the comic book division, a component of the business, on September 1, 2022. The carrying amount of the assets of the division was P4,000,000 and the fair value less cost of disposal was P3,500,000. The disposal date is expected on June 1, 2023. The division reported an operating loss of P200,000 for the year ended December 31, 2022. What ’ amount should be reported as pretax loss from discontinued operation, in 2022? _ a. 500,000 b. 200,000 c. 700,000 d. 0 530 Scanned with CamScannerproblem 33-3 (IFRS) qebra Company isa diversified entity with nationwide i | jn commercial ‘real estate, development, hankite, pice | food distribution. The food distribution division wes deemed to be inconsistent with the long-term direction of the entity. | On October,.1, 2022 the board of directors voted to’ approve | the disposal of this division. The sale is expected to Sheu in August 2023. The food distribution had revenue of P45,000,000 and expenses of P27,000,000 for the period January 1 to September | 30, and revenue of.P15,000,000 and expenses of P10,000,000 for the period October 1 to December 31. ‘| The carrying amount of the division’s assets on December | 31,2022 was P55,000,000 and the fair value less cost of disposal was P50,000,000. | The sale contract required Zebra to terminate certain employees ) incurring an expected termination cost of P4,000,000 to be paid | by December 15, 2023. ; | What amount should be reported as pretax income from discontinued operation for 2022? a. 18,000,000 b. 23,000,000 c. 19,000,000 * d. 14,000,000 Problem 33-4 (IAA) Enron Company decided on, August 1, 2022 to dispose of a component of business. The component was sold on November 30, 2022. ‘ The net income of Enron Company 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 of P1,000,000.on the November 30 sale of the business component. ° What amount should be reported as pretax income or loss from discontinued operation for 2022? ; a 1,000,000 loss b. 5,000,000 income ¢. 4,000,000 loss 4. 4,000,000 income. 531 Scanned with CamScannerProblem 33-5 (AICPA Adapted) -On December 31, 2022, 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, 2022. The division was actually sold for P1,200,000 less than carrying amount in 2023." : The division's operating loss for 2022 was P2,000,000. The entity estimated that the division's operating loss for 2023 would be P500,000. What amount should be reported as pretax loss from discontinued operation in 2022? a. 3,000,000 b. 2,000,000 c. 1,000,000 d. 3,200,000 Problem 33-6 (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, 2022, the entity adopted a plan to sell the assets of the division. . - The actual sale was effected on December 15, 2022 at a price of P3,000,000. The carrying amount of the division's assets was P5,000,000. nes The farm equipment division incurred. before-tax operating loss of P1,500,000 from the beginning of the year through December 15, 2022. What amount should be reported as pretax loss from discontinued operation for the current year? 2,000,000 3,500,000 1,500,000 0 “pe oe 532 Scanned with CamScannerproblem 83-7 Multiple choice (IFRS) Which criterion does not have to be met i 1h operation to be classified as discontinued? yore ae a a. The operation shall represent a separate major line of business or geographical area. p. The operation is part of a single plan to dispose of a separate major line of business or geographical area. ¢. The operation is a subsidiary acquired exclusively with a view to resale. ' d. The operation must be sold within three months after the end of reporting period. 9, What is the presentation of the results from discontinued operation in the income statement? a. Single amount below income from continuing operations b. Single amount below gross income : c. Broken down into each category of revenue and expense d. Presented in the notes , Assets of discontinued operation are measured at iS) a. Lower. between fair value less cost of disposal and carrying amount Fair value less cost of disposal Net realizable value y Higher between fair value less cost of disposal and carrying amount ° oa : Bos 4, Which is not required for a discontinued operation? Management must have entered into a sale agreement. The component is available for immediate sale. The sale is highly probable Management is committed to sell the component at a reasonable price So PS 5. A business component shall be reported as discontinued operation a. When the entity classified it as held for sale. b. When the éntity received an offer for the component c. When the entity sold part of the assets of the component i . d. When the entity ‘sold majority of the assets of the component ‘ 588 Scanned with CamScannerProblem 33-8. Multiple choice: (AICPA Adapted) 1. When a component of an entity was discontinued during the year, the loss on discontinued operation should a. Exclude the: associated employee relocation cost. b. Exclude operating loss for the period. c.. Inclile associated employee termination cost. d. ‘Exclude associated lease’ cancelation cost. 2. When.an entity: decided to sell a business component, the gain on the disposal should be Ff a. Presented as other income. b. Presented as an adjustment: to retained earnings. c. Netted against the loss from operations of the component as'a part of discontinued operations. d. Included in other comprehensive income. 3. When a component of a business has been discontinued during the year, the loss on discontinued. operations should a. Include operating loss of the current period. b. Exclude operating loss during the period. c.- Be classified an extraordinary item. d. Be classified an operating item. 4. When.a component of a business has been discontinued during the year, the operating loss of the component for the current year should be included in a. Income statement as part of revenue and expenses. b. Income statement as part,of the loss on: the discontinued operation c. Income from continuing operations d. Retained earnings 5. When an entity discontinued an operation, the transaction should be reported as a. A prior period error b. Other income and expense item c. A single amount after income from continuing operations and before net income d. Bulk sale of assets ‘included in income from continuing operations. 584 Scanned with CamScanner