Question

Loschiavo Ltd. (LL) has a 31 December fiscal year end. LL disposed of its Computer Programming Group (CPG) on 31 July 20X3. CPG had a net loss (after taxes) of $18,850,000 in 20X3, to the date of disposal. The division was sold for $237,800,000 in cash plus future royalties through 31 May 20X4, which were guaranteed to be $10,000,000. The minimum guaranteed royalties were included in the computation of the 20X3 gain on the sale of the division. Actual royalties received in 20X4 were $15,000,000. Excerpts from comparative income statements found in the 31 December 20X4 financial statements are as follows:

 

Required:
1. Determine the net book value of CPG at the date of disposal.

2. Why does LL report a gain on the sale of the discontinued operation of $2.2 million in the year ending 31 December 20X4?

3. LL reports an after tax loss from discontinued operations of $18.8 million for the year ending 31 December 20X3. Over what period was the loss accrued?

Answer 1

Requirement 1

 

(Amounts in millions of dollars)

 

Sales price of CPG: 

    Cash proceeds................................................................................        $237.8

    Guaranteed royalties......................................................................           10.0       $247.8

Less: Total Gain on sale:

    After tax gain, as reported.............................................................            91.2

          Tax on gain..............................................................................               17.0

    Operating loss included in gain.....................................................           18.8         127.0

Net book value of CPG net assets.....................................................                          $120.8

 

Requirement 2

 

The guaranteed minimum royalties were $10 million and were included in the computation of the gain on the disposal. Actual royalties were $15 million, resulting in an additional net gain of $2.2 million after tax ($2.2 + $.6 = $2.8).

 

Requirement 3

 

LL’s fiscal year begins on 1 Jan. LL sold CPG as of 31 July 20x3. Therefore, the loss is accrued over the period 1 Jan 20x3 through 31 July 20x3.

(Amounts in millions of dollars)

 

Sales price of CPG: 

    Cash proceeds................................................................................        $237.8

    Guaranteed royalties......................................................................           10.0