Question

Due to the decline in popularity of board games, on February 1, 2019 the management of Toystore Inc. made the decision to sell its games division. Management launched an immediate search for possible buyers, and a consultant was hired to facilitate a quick sale. The estimated cost to sell the plant assets as of February1 is $140,000.   Management is continuing to operate the division until a buyer is found, but is hopeful that another company will buy out the division before the company’s May 31st year end, or at least by July 1, 2019 when the Christmas production run begins.

The net assets for the games division as of February 1, 2019 were as follows:

	Net Book Value	Fair Value
Inventory	560,000	490,000
Production Equipment (net)	4,700,000	4,650,000
Accounts Payable	(630,000)	(630,000)

At the end of May, a buyer for the division still had not been found. Consequently, Toystore's management had an independent appraiser come in to re-evaluate the fair value of the equipment and inventory. The new recoverable amount for the inventory was 370,000 and the net production equipment including costs to sell had a value of $4,560,000.

After tax net income without the games division was $ 7,820,000 at Toystore's May 31, 2019 fiscal year end. The games division recorded a $685,000 operating loss before taxes for the fiscal year.

The company’s income tax rate is 40%.   

Required:

• (A)   The games division qualifies for reporting as a discontinued operation. Prepare all the appropriate journal entries for the 2019 fiscal year.
• (B) Calculate the total net income for the discontinued games division as of the May 31, 2019 year end.

Answer 1

JOURNAL ENTRIES TO RECORD GAMING DIVISION AS DISCONTINUED OPERATION

Sr. No.	PARTICULARS	DEBIT ($)	CREDIT ($)
1	Profit and loss a/c. Dr. (discontinued games division) Provision for expenses a/c. Cr. (provision for expenses on disposal of assets created)	140,000	140,000
2	Profit and loss a/c. Dr. (discontinued games division) Inventory a/c. Cr. Production equipment Cr. (inventory and production equipment reduced to realisable value)	330,000	190,000 140,000
3	Deferred tax asset Dr. Profit and loss a/c. Cr. (discontinued games division) (Deferred tax asset created assuming that the loss from gaming division can be set off against future profits of continued division) (40% of 1,155,000 calculated below)	462,000	462,000
Net Income of discontinued games division as of the May 31, 2019 year end
	Operating loss before tax (gaming division)	(685,000)
	Less: provision for expenses	(140,000)
	Less: adjustment for realisable value of assets	(330,000)
	Net loss before tax	(1,155,000)
	Deferred tax asset	462,000
	Net loss (after tax)	693,000