Question

The Station A Division of Sunshine Company is losing $150,000 per month. The Board of Directors decides to dispose of the Station A on June 30, 2013. The carrying value of the Station A net asset on June 30, 2013 is $3,000,000, and its fair value is appraised to $2,800,000 and disposal cost is estimated to $500,000. The Station A hasn’t continued to sustain same loss until Dec 31 2014. In the meantime, the Station A Division has continued losing $200,000 per month since Jan 2014. After months of negotiations, the Station A division's net assets are sold on May 1, 2014 for $1,500,000 (At that time, the carrying value of the Station A division net asset decreases by 10% on the beginning balance of Current Year).

Addition Information:
June 30 is Sunshine ‘s Fiscal Year Ending Date. Income tax rate is 40%.

How should the disposal of the Station A Division be reported on Sunshine company's 2013 and 2014 financial statements? Please give the detailed computation process.

Answer 1

Solution:-

Year end June 30, 2013:-

Particulars	Amount	Amount
Carrying cost of Net assets of station A divisiion		$3,000,000
Fair value	$2,800,000
Disposal cost	$500,000	=  2,800,000 - 500,000 = $2,300,000
Impairment loss		= $3,000,000 - $2,300,000 = $700,000

• According to the Us GAAP ,organization needs to make revelation for ceasing task on the occasion of endorsement by BOD.
• Net resources ought to be conveyed to equitable esteem less transfer cost .
• Accordingly impedance misfortune ought to be reserved.

Balance sheet on June 30,2013 :-

Assets Held for sale (station A division)	$2,300,000
Statement of loss and profits :
loss from impairment of assets	$700,000
Loss from discontinuing operation net of taxes	$1,070,000

Year end June 30,2014 :-

Statement of loss and profit :
Loss from discounting opertion	= (3,000,000 * (40% - 10%)) + (3,000,000 * 40%) - (2,800,000 * (40% - 10%)) = 900,000 + 1,200,000 - 840,000 = $1,260,000
Loss from sale of assets held for sale	=  $2,300,000 - (1,500,000 - 500,000) = 2,300,000 - 1,000,000 = $1,300,000