QUESTION: 45

A segment of Ace Inc. was discontinued during 1992. Ace's loss from discontinued operations should not:

Include employee relocation costs associated with the decision to dispose.
Exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992.
Include additional pension costs associated with the decision to dispose.
Include operating losses of the current period up to the date the decision to dispose of the segment was made.

Answer(s): B

Explanation:

Choice "b" is correct. Ace's loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses should be included.
Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations.
Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations.
Choice "d" is incorrect. Ace's loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date.
All 1992 operating losses should be included.

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QUESTION: 46

On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.
Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount in 20X3. Maxy's effective tax rate is 30%. In its 20X2 income statement, what amount should Maxy report as loss from discontinued operations?

$980,000
$1,190,000
$1,400,000
$1,700,000

Answer(s): B

Explanation:

Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value, there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000 impairment loss plus the $1,400,000 20X2 operating loss would be recognized in 20X2 net of tax. The total loss would be $1,700,000 × 70% (100% - 30%) or $1,190,000.

Choice "a" is incorrect. It includes the 20X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2 operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but not the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax. Choice "d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.

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QUESTION: 47

On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 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 20X3 turned out to be correct. Alpha's 20X2 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 20X3 income statement, what amount should Maxy report as loss from discontinued operations?

$350,000
$500,000
$420,000
$600,000

Answer(s): C

Explanation:

Choice "c" is correct. The 20X3 loss from discontinued operations would include both the 20X3 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 .70 or $420,000. Choice "a" is incorrect. It includes the 20X3 operating loss of $500,000 but not the $300,000 impairment loss but does report the 20X3 operating loss net of tax. Choice "b" is incorrect. It includes the 20X3 operating loss of $500,000, but not the $100,000 loss on disposal, and reports the 20X3 operating loss gross of tax and not net of tax. Choice "d" is incorrect. It reports the 20X3 loss from discontinued operations gross of tax and not net of tax. The 20X3 loss from discontinued operations should include both the 20X3 operating loss of $500,000 and the loss on disposal of $100,000, net of tax, for a total of $600,000 x .70 or $420,000.

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QUESTION: 48

In which of the following situations should a company report a prior-period adjustment?

A change in the estimated useful lives of fixed assets purchased in prior years.
The correction of a mathematical error in the calculation of prior years' depreciation.
A switch from the straight-line to double-declining balance method of depreciation.
The scrapping of an asset prior to the end of its expected useful life.

Answer(s): B

Explanation:

Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements of prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a non-GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).
Choice "a" is incorrect. This change is a change in accounting estimate. Choice "c" is incorrect. This change is a change for one GAAP method of depreciation to another GAAP method of depreciation. Under SFAS No. 154, it is treated as a change in accounting estimate effected by a change in accounting principle and is handled prospectively, and not as a prior-period adjustment.
Choice "d" is incorrect. This is a business activity ordinary in nature.

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