Question

On November 1, 2014, management of Carley Corporation committed to a plan to dispose of PFG Company, a major subsidiary. The disposal meets the requirements for classification as discontinued operations. The book value of PFG Company was $6,500,000 and management estimated the fair value less costs to sell to be $8,000,000. For 2014, PFG Company had a loss of $2,000,000. How much should Carley Corporation present as loss from discontinued operations before the effect of taxes in its income statement for 2014:

A. $2,000,000.

B. $3,500,000.

C. $500,000.

D. $1,500,000.

Answer 1

Ans

First calculate net income from disposal of PFG as done below

Net income/(loss) from disposal of PFG = estimated fair value less cost – book value

= $8,000,000 - $6,500,000

=$1,500,000

Loss from operations of PFG = $2,000,000

Income/(loss) from discontinued operations

Net income/(loss) from disposal of PFG = $1,500,000

Loss from operations of PFG = ($2,000,000)

Net effect of loss from discontinued operations = $500,000

The answer is C loss from discontinued operations is $500,000