Posted: 23 Feb 2012 at 14:23 | IP Logged

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