Question

Part A:  In each of the following circumstances, determine whether the disposal would qualify as a discontinued operation.  All companies are calendar year companies and the transactions are occurring in 2018. Give citations from the ASC to justify your answer.

1.      An entity manufactures and sells consumer products that are grouped into five major product lines. Each product line includes several individual products that comprise the lowest where operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.  Product line 1 is made up of almost 100 different individual products. Due to declining sales, 3 products in Product line 1 were discontinued during the year.

2.         An entity manufactures and sells consumer products that are grouped into       five major product lines. Each product line includes several brands that       comprise the lowest where operations and cash flows that can be clearly            distinguished, operationally and for financial reporting purposes, from the           rest of the entity.  Product line 3 which makes up between 20 & 25% of the            entity’s total revenues has experienced significant market declines while the   other product lines have been growing.  As a result, the entity has decided to           sale its operations associated with Product line 3.

3.         An entity operates restaurants in several states. For that entity, each   restaurant comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the       rest of the entity.  As a result of an above market offer for two of its   restaurants in the state of Alabama, the entity sold these restaurants. These            two restaurants produced between 1 & 3% of the entity’s total revenues and            comprised about 1.5% of the entity’s total assets.

Part B. ABC Co. decided on March 3, 2018 to dispose of their Widget Segment. The sale of the segment was completed on November 13, 2018.  The disposal of this segment qualifies as a discontinued operation.  Income Statement data for ABC for calendar years 2016-2018 are as follows:

                                                               2018                          2017                          2016   

Sales                                                  $3,000,000               $2,700,000               $2,500,000

Cost of goods sold                             1,800,000                  1,593,000                  1,525,000

Operating expenses                             700,000                     680,000                     650,000

These amounts include the operating results for the Widget Segment through its disposal on November 13, 2018.  Income Statement data for the Widget Segment separately for 2016-2018 are as follows:

                                                               2018                          2017                          2016   

Sales                                                  $450,000                   $600,000                   $700,000

Cost of goods sold                            315,000                     408,000                     455,000

Operating expenses                          120,000                     150,000                     130,000

The book value of the assets and liabilities of Widget on November 13, 2018 was 4,800,000.  The sales price was 6,210,000.  ABC has a tax rate of 28% for 2016 & 2017 and a rate of 25% for 2018.

Required:  Prepare, in good form, complete comparative Income Statements for ABC for the years 2016-2018.

Answer 1

Part A	1) Operation Assets or component must be disposed or held for sale.
	2) Component shall be a distinguishable separate part of whole business operations such as business or geographical segement which is intentionally to be discontinued or held for sale.
	Answers
	1) IT is a separate component ,it is already discontinued which means that it might be sold or held available for sale.
	IT is discontinued operation
	2) IT is a separate product line similar to business segments.It is not disposed off but they have decided to sale it off which means it is held for sale.
	IT is discontinued operation.
	3) The geographical segment of restaurant have very less share in total revenue and very less share in total revenue and very less amount of total assets are employed there.
	Therefore it is not considered as reportable segment.
	But if management have selected that segment as reportable segment than it will be considered as reportable segment.
	In that case it would be discontinued operation.
Part B
			Year 2018	Year 2017	Year 2016
	Sales	Working-1	$2,550,000	$2,100,000	$1,800,000
	Less: Cost of Goods Sold	Working-1	($1,485,000)	($1,185,000)	($1,070,000)
	Gross Margin		$1,065,000	$     915,000	$     730,000
	Less: Operating Expense	Working-1	$   -580,000	$   -530,000	$   -520,000
	Income from continuing operations before income taxes		$     485,000	$     385,000	$     210,000
	Income tax expense 28% and 25%		$   -121,250	$   -107,800	$     -58,800
	Income from continuing operations	A	$     363,750	$     277,200	$     151,200
	Discontinued operations:
	Income from discontinued operations	Working-2	$       15,000	$       42,000	$     115,000
	Gain on disposal of discontinued operations	6210000-4800000	$1,410,000
			$1,425,000	$       42,000	$     115,000
	Income tax expense 28 and 25		$   -399,000	$     -10,500	$     -28,750
	Income from discontinued operations	B	$1,026,000	$       31,500	$       86,250
	Net Income	A+B	$1,389,750	$     308,700	$     237,450
	Working-1
	Sales		$3,000,000	$2,700,000	$2,500,000
	Less: Widget Sale		$   -450,000	$   -600,000	$   -700,000
			$2,550,000	$2,100,000	$1,800,000
	COGS		$1,800,000	$1,593,000	$1,525,000
	Less: Widget COGS		$   -315,000	$   -408,000	$   -455,000
			$1,485,000	$1,185,000	$1,070,000
	Operating Expense		$     700,000	$     680,000	$     650,000
	less: Widget Op Exp		$   -120,000	$   -150,000	$   -130,000
			$     580,000	$     530,000	$     520,000
	Working-2
	Widget income before tax:
	Widget Sale		$     450,000	$     600,000	$     700,000
	Less: Widget COGS		$   -315,000	$   -408,000	$   -455,000
	Less: Widget Op Exp		$   -120,000	$   -150,000	$   -130,000
			$       15,000	$       42,000	$     115,000