Chapter 4 - SFAS. No. 144
Chapter 4
End of Chapter Material Relating to SFAS No. 144
PRACTICE 1COMPUTATION OF INCOME FROM DISCONTINUED OPERATIONS
Fleming Company has two divisions, E and N. Both qualify as business components. In 2005, it is decided to dispose of the assets and liabilities of Division N; it is probable that the disposal will be completed early next year. The revenues and expenses of Fleming for 2004 and 2005 are as follows:
20052004
Sales – E$5,000$4,600
Total Non-Tax Expenses – E4,4004,100
Sales – N3,5005,100
Total Non-Tax Expenses – N3,9004,500
During the later part of 2005, Fleming disposed of a portion of Division N, and recognized a pre-tax loss of $2,000 on the disposal. The income tax rate for Thom Beard Company is 30 percent. Prepare the 2005 comparative income statement.
PRACTICE 2COMPUTATION OF INCOME FROM DISCONTINUED OPERATIONS
Refer to the data in Practice 4-11. Repeat the exercise assuming it is Division E that is being discontinued. Also assume that instead of a $2,000 pre-tax loss on the disposal there was a $1,500 pre-tax gain.
Exercise 1Discontinued operations
On June 30, 2005, top management of Garrison Manufacturing Co. decided to dispose of an unprofitable business component. An operating loss of $130,000 associated with the component was incurred during the year. The plant facilities associated with the business segment were sold on December 1, and a $15,000 gain was realized on the sale of the plant assets.
(a)Assuming a 30% tax rate, prepare the discontinued operations section of Garrison Manufacturing Co.’s income statement for the year ending December 31, 2005.
(b)What additional information about the discontinued segment would be provided by Garrison Manufacturing if it were reporting using the accounting standards of the United Kingdom?
Exercise 2Discontinued operations
Cameron Baird Company operates two restaurants, one in Grantsville and one in Panaca. The operations and cash flows of the two restaurants are clearly distinguishable from one another. During 2005, Cameron Baird decided to close the restaurant in Panaca and sell the property; it is probable that the disposal will be completed early next year. The revenues and expenses of Cameron Baird for 2005 and for the preceding two years are as follows:
200520042003
Sales – Grantsville$50,000$43,000$35,000
Cost of Goods Sold -- Grantsville20,00018,00015,000
Other Expenses – Grantsville13,00012,00011,000
Sales – Panaca25,00032,00060,000
Cost of Goods Sold -- Panaca14,00020,00025,000
Other Expenses – Panaca18,00017,00015,000
The other expenses do not include income tax expense. During the later part of 2005, Cameron Baird sold much of the kitchen equipment of the Panaca restaurant, and recognized a pre-tax gain of $10,000 on the disposal. The income tax rate for Cameron Baird Company is 35 percent.
Prepare the three-year comparative income statement for 2003-2005.
Problem 1Discontinued operations in process
In 2005, Laetner Industries decided to discontinue its Laminating Division, a separately-identifiable component of Laetner’s business. At December 31, Laetner’s year-end, the division has not been completely sold. However, negotiations for the final and complete sale are progressing in a positive manner, and it is probable that the disposal will be completed within a year. Analysis of the records for the year disclosed the following relative to the Laminating Division.
Operating loss for the year...... $89,900
Loss on disposal of some Laminating Division assets during 2005. 5,000
Expected operating loss in 2006 preceding final disposal...... 45,000
Expected gain in 2006 on disposal of division...... 20,000
Instructions:
Assuming a 35% tax rate, prepare the discontinued operations section of Laetner Industries’ income statement for the year ending December 31, 2005.
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