Question

On October 28, 2021, a company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2021, the end of the company's fiscal year. The division's loss from operations for 2021 was $1,990,000. The division's book value and fair value less cost to sell on December 31 were $2,940,000 and $3,620,000, respectively. What before-tax amount(s) should the company report as loss on discontinued operations in its 2021 income statement?

• No loss would be reported.

• $1,990,000 loss.

• $2,670,000 loss.

• $680,000 gain included in continuing operations and a $1,990,000 loss from discontinued operations.

Answer 1

Solution:

Option 2 is correct that is a loss of $ 1,990,000 would be reported.

Explanation:

Loss on Discontinued operations includes the division's loss from operations for 2021 given as $ 1,990,000.

We should also include the impairment loss in the above amount but since the fair value less cost to sell is more than the book value we have a fair value gain. For computation of loss from discontinued operations this gain should not be considered.

Fair value gain = $ 3,620,000 - $ 2,940,000

= $ 680,000

Rest of the above options given are incorrect because these either do not include the loss from operations (Option 1) or have included the fair value gain ( Option 3) or have reported the fair value gain in continuing operations which is incorrect because management has already decided to sell that division ( option 4).