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Joined: 04 Oct 2010
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Posted: 23 Feb 2012 at 14:23 | IP Logged Quote msod1273

Hi..this is a question from Becker Passmaster for Chapter 1. The recognition of the impairment loss in Year 1 is bothering me because the question implies that the impairment loss estimate was in Year 2. The question is as follows:

On Dec 31, Year 1, the Board of Directors of Maxy Company, committed to a plan to discontinue the operations of its Alpha division. Maxy estimated that Alpha  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. Alpha’s Year 1 operating loss was $1,400,000 and the division was actually sold for $400,000 less than its carrying value in Year 2. Maxy’s effective tax rate is 30%. In its Year 1 income statement, what amount should Maxy report as loss from discontinued operations?

A               980,000

B               1,190,000

C               1,400,000

D               1,700,000


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Joined: 25 Dec 2011
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Posted: 23 Feb 2012 at 18:39 | IP Logged Quote Tareq

I would say answer number B. The question is asking about the loss from
discontinued operations in year 1. Take the actual loss plus the estimated
loss on sale ( 1,400,000 + 300,000 ) and multiply it by the tax rate =
Do not take the 500,000 estimated operating loss because it will be
reported in year 2.

The reason why to add the 300,000 is because the selling plan was adopted
on year 1 so the decrease of the division should be reported in year 1 EVEN
if it is an estimation.

This is my answer and I do not guarantee that it is right :)
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Joined: 21 Feb 2012
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Posted: 23 Feb 2012 at 22:10 | IP Logged Quote austingolduk

yr 1 income statement = 1,400,000 + 300,000= 1,700000 x .7 = 1,190,000. The answer is B.
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Posted: 24 Feb 2012 at 12:59 | IP Logged Quote msod1273

Thanks a ton for the response and the answer. The answer is B and now I understand why the estimated loss is added to the operating loss in Year 1.
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