[ab29]

Becker Question –

Can someone explain why the impairment loss of 300k isn’t included in year 2?

On December 31, Year 1, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. The decision represents a major strategic shift and will have a significant effect on its operations and financial results. Maxy estimated that Alpha’s Year 2 operating loss would be $500,000 and that the fair value of Alpha’s facilities was $300,000 less than their carrying amounts. The estimate for Year 2 turned out to be correct. Alpha’s Year 1 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount. Maxy’s effective tax rate is 30%

In its Year 2 income statement, what amount should Maxy report as loss from discontinued operations?

a.$420,000

b.$350,000

c.$500,000

d.$600,000

ANSWER: A

[Anonymous]

becker should give you the explanation

[Wannafree]

The Year 2 loss from discontinued operations would include both the Year 2 operating loss of $500,000 (which turned out to be a correct estimate) and the “additional” loss (on disposal) of $100,000, net of tax, for a total of $600,000 x 0.70 or $420,000.
assume Loss of 300K was taken last year so just 100K loss this year.

WannaB

[Author]

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