Question

The Ottoboni Corporation had two operating divisions, one manufacturing division and a finance division. Both divisions are considered separate components. The finance division has been unprofitable, and on October 3, 2014, Ottoboni adopted a formal plan to sell the division, which subsequently was considered ‘held for sale’. The before-tax operating loss of the division for the year was $270,000. The company’s effective tax rate is 40%. The after-tax income from continuing operations for 2014 is $600,000. On December 31, 2014, the company’s fiscal year-end, the book value of the assets of the finance division was $2,100,000.

What will the firm report for discontinued operations for 2014, if anything, under each of the following scenarios?

A. The sale was completed on December 31, 2014, for $2,400,000.

B. The sale was completed on March 15, 2015. Fair market value on December 31, 2014 was $2,400,000.

C. The sale was completed on March 15, 2015. Fair market value on December 31, 2014 was $2,000,000.

Answer 1

Discontinued operations are the results of operations of a component of an entity that is either being held for sale or which has already been disposed of. The designated results of operations must be reported as a discontinued operation within the financial statements if both of the following conditions are present:

• Resulting elimination. The disposal transaction will result in the operations and cash flows of the component being eliminated from company operations.
• Continuing involvement. There will be no significant continuing involvement by the company in the operations of the component, once the disposal transaction has been completed. Continuing involvement implies the ability to influence the operating or financial policies of the disposed component.

If there were adjustments for disposal-related amounts previously reported for discontinued operations, they should be classified separately within the discontinued operations section of the income statement in the current period. Examples of these adjustments are:

• Benefit plan obligations. Contingencies related to employee benefit plan obligations are settled, such as postemployment benefits. This type of adjustment is usually restricted to being classified within discontinued operations if it occurs no later than one year following the disposal transaction, unless delayed by circumstances beyond the control of the company.
• Contingent liabilities. Contingencies related to liabilities associated with a disposal transaction are subsequently resolved, such as site remediation liabilities retained by the seller.
• Contingent terms. Contingencies related to terms under which a disposal transaction was concluded are subsequently resolved, such as adjustments to the initial price paid.

If the buyer of a discontinued operation assumes the debt associated with the operation, any interim interest expense incurred by the seller should be allocated to discontinued operations. GAAP specifically does not allow the allocation of general corporate overhead to discontinued operations.

from the above information you can compare each and every situation