CHAPTER 7 DISCONTINUED OPERATION Problem 7-1 (IFRS) On September 30, 2019, when the carrying amount of the net assets ofa 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, 2020 ata sale price of P60,000,000. In addition, prior to January 31, 2020, 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, 2020. ; . The segment revenue and expenses for 2019 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 2019? a. 14,000,000 b. 20,000,000 c. 15,000,000 d. 10,500,000 Solution 7-1 Ariswer a_ . Revenue 40,000,000. Expenses (45,000,000) Impairment loss 2 (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) 86° Scanned with CamScannerProblem 7-2 (IFRS) Xavier Company has three segments, A, B and C. Segment C, the closing division, is deemed inconsistent with the long-term direction of the entity. Management has decided to dispose of Segment C. On November 15, 2019, 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 2019, 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 31,2019. The income tax rate is 30%. What amount of loss from discontinued operation should be reported for 2019? 15,000,000 10,500,000 7,000,000 5,000,000 ae oP 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 : f 90,000,000 Fair value less cost of disposal 70,000,000 Impairment loss 20,000,006 pA LULL 87 Scanned with CamScanner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 division was deemed to be inconsistent with the long-term direction of the entity. On October 1, 2019 the board of directors voted to approve the disposal of this division. The sale is expected to occur in August 2020. The food distribution had revenue of P35,000,000 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 net assets on December 31, 2019 was P55,000,000 and the fair value less cost of disposal was P60,000,000. The sale contract required Zebra to terminate certain employees incurring an expected termination cost of P4,000,000 fo be paid by December 15, 2020. The income tax rate is 30%, What amount should be reported as income from discontinued operation for 2019? a. 7,700,000 b. 8,300,000 c. 9,000,000 d. 6,300,000 Solution 7-3 Answer d Revenue — January | 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 expense (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 88 Scanned with CamScannerProblem 7-4 (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, 2019, the entity adopted a plan to sell the assets of the division. The actual sale was effected on December 15, 2019 at a price of P3,000,000. The carrying amount of the division’s assets was P5,000,000. The farm equipment division incurred before-tax operating loss of P1,500,000 from the beginning of the year through December 15, 2019. The entity’s after-tax income from continuing operations is P9,000,000. The income tax rate is 30%. What amount should be reported as net income forthe current year? a. 5,500,000 b. 6,550,000 c. 6,300,000 d. 7,600,000 Solution 7-4 Answer b Inconie 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 dh December 15, 2019 (2,000,000) Farm equipment division operating loss for 2019 (1,500,000) Total loss from discontinued operation (3,500,000) Loss after tax (3,500,000 x'70%) (2,450,000) 89 Scanned with CamScannerProblem 7-5 (AICPA Adapted) Dublin Company liad 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, 2019, the entity adopted:a formal plan to sell the division. At December 31, 2019, the component was considered held for sale. The sale was completed on April 30, 2020. On December 31, 2019, the carrying amount of the assets of the horse division was P5,000,000. On that date, the fair value of the assets less cost of disposal was P4,000,000. The before-tax operating loss of the horse division for the year was P1,500,000. ‘The after-tax income from continuing operations of the entity for 2019 ‘was P8,000,000. The income tax rate is 30%. What is the net income for 2019? a. 4,500,000 b. 5,600,000 c. 3,850,000 d. 6,250,000 Solution 7-5 Answer d Income from continuing operations . 8,000,000 Loss from discontinued operation . (1,750,000) Net income 6,250,000 Fair value of assets of horse division 4,000,000 Carrying amount of assets 5,000,000 Impairment loss on December 31, 2019 (1,000,000) Operating loss of horse diyision for the year 1,500,000) Total loss (2,500,000) Tax effect (30% x 2,500,000) 750,000 Loss from discontinued operation (1,750,000) 90 Scanned with CamScannerProblem 7-6 (IAA) In 2019, Isuzu Company decided to discontinue the Electronics Division, aseparately identifiable component of Isuzu’s business. On December 31, 2019, the division had not been completely sold. However, negotiations for the final and complete sale are progressing ina positive manner and it is probable that the disposal will be completed within a year. Analysis of the records for the year disclosed the following relative to the Electronics Divsision: Operating loss for 2019 8,000,000 Loss on disposal of some Electronics Division assets during 2019 500,000 ” Expected operating loss in 2020 preceding final disposal 1,000,000 Expected gain in 2020 on disposal of division * 2,000,000 What amount should be reported as pretax Joss from discontinued operation in 2019? 8,000,000 8,500,000. . 9,500,000 7,500,000 pO TP Solution 7-6 Answer b . Operating loss for 2019 8,000,000 Loss on disposal in 2019 500,000 Pretax loss from discontinued operation 8,500,000 The expected operating loss in 2020 and expected gain on disposal a in 2020 are not recognized in 2019. 91 Scanned with CamScannerProblem 7-7 (AICPA Adapted) On December 31, 2019, Max Company committed to a plan to discontinue the operations of Underwear Division. The fair value of the facilities was P 1,000,000 less than carrying amount on December 31, 2019. The division’s operating loss for 2019 was 2,000,000 and the division was actually sold for P1,200,000 less than carrying amount in 2020. The entity estimated that the division’s operating loss for 2020 would be P500,000. What amount should be reported as pretax loss from discontinued operation in 2019? 3,000,000 2,000,000 1,000,000 3,200,000 peop Solution 7-7 Answer a Opereting loss in 2019 . . 2,000,000 Impairment loss in2019 - 1 1,000,000 Loss from discontinued operation 3,000,000 92 Scanned with CamScannerProblem 7-8 (IAA) Flame Company has two divisions, North and South. Both qualify as business components. In 2019, the entity decided to dispose of the assets and liabilities of division South and it is probable that the disposal will be completed early next year. The revenue and expenses of Flame Company are as follows: 2019 2018 Sales-North 5,000,000 4,600,000 Total nontax expenses-North . 4,400,000 4,100,000 Sales-South . 3,500,000 5,100,000- Total nontax expenses-South 3,900,000 4,500,000 - ~ During the later part of 2019, the entity disposed ofa portion of division South and recognized a pretax loss of P2,000,000 on the disposal. What amount should be reported as pretax loss from discontinued. operation in 2019? 2,000,000 2,400,000 1,400,000 1,600,000 aesP Solution 7-8 Answer b Sales — South 2019 . 3,500,000 Expenses — South 2019 3,900,000 Operating loss : ( 400,000) Loss on disposal (2,000,000) Total pretax loss for 2019 (2,400,000). 93 Scanned with CamScannerProblem 7-9 (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 2019, 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 2019 and for the preceding two years areas follows: 2019 2018 2017 Sales-Boracay 60,000 48,000 40,000 Cost of goods 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 2019, the entity sold some of the kitchen equipment of the Dakak restaurant and recognized a pretax gain of P15,000 on the What amount should be reported as pretax income or loss from - discontinued operation for 2019? a. 8,000 loss b. 7,000 gain . c. 5,600loss _ d. 1,000 gain ‘ wt Solution 7-9 Answer b Sales — Dakak 2019 23,000 Cost of goods sold - Dakak 2019 (14,000) Other expenses — Dakak 2019 (17,000) Gain on disposal 15,000 “Income from discontinued operation before tax 7,000 94 Scanned with CamScannerProblem 7-10 (IFRS) Marquee Company, a parent entity, approved on December 1, 2019 a plan to sell a subsidiary. The sale is expected to be completed on March 31, 2020. The year-end is December 3}, 2019 and the financial statements were approved on March 1, 2020. The subsidiary had net assets with carrying amount of P15,000,000 including goodwill of P1,500,000 on December 31, 2019. The subsidiary made a loss of P3,000,000 from January 1 to March 1, 2020 and is expected to make 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 sale of the subsidiary but no contract had been “signed. The entity expected to sell the subsidiary for P9,000,000 and to incur cost of disposal of P500,000. r The value in use of the subsidiary was estimated to be P10,000,000. On December 31,2019, 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 7-10 Answer d , Carrying amount 15,000,000 Fair value 9,000,000 Cost of disposal (__500,000) 8,500,000 Anoncurrent asset or disposal group classified as held forsale shal be measured at the lower of carrying amount and fair value less cost of disposal. The value in use is ignored. Fair value less cost of disposal 95 Scanned with CamScanner