to sell are estimated to be $1,650.
The carrying value of the assets and liabilities of the division is $12,525 before the adjustments (depreciation, amortization, adjustment of valuation accounts, and similar periodic adjustments) are made.
The adjustments reduce the carrying value of the assets and liabilities by $125.
Losses from operations of the division from the date it is classified as held‐for‐sale to the end of the fiscal year are $580. (This loss does not include the GAAP adjustments noted above.)
Anticipated future losses from operations of the division from the end of this fiscal year to the expected sales date are $1,999.
The tax rate is 40%.
The income statement presentation of discontinued operations would be:
| Discontinued operations (Note X) | |
| Loss from operations of discontinued division, net of tax of $982 | $1,473 |
| Loss on disposal of discontinued division, net of tax of $1,310 | 1,965 |
| Loss on discontinued operations | $3,438 |
The loss from operations of the discontinued pager division is the sum of the $1,750 loss incurred prior to the date the assets and liabilities were classified as held‐for‐sale, plus the $125 adjustments that were recorded, plus the $580 loss incurred from the date the division was classified as held‐for‐sale to the end of the fiscal year. The sum ($2,455) less the tax effects of $982 ($2,455 × 40%) is the loss from operations of $1,473.
The loss on disposal is the difference between the carrying value of the division and its fair value less costs to sell. The carrying value of the division is $12,400 ($12,525 less the adjustments of $125). The fair value of the division less costs to sell is $9,125 ($10,775 fair value less costs to sell of $1,650). The difference of $3,275 less the tax effects of $1,310 ($3,275 × 40%) is the loss on disposal of $1,965. The anticipated future losses from operations of the division will be reported in discontinued operations in the future period in which they occur. They are not included in the loss on disposal in the current fiscal year.
Example 2.4: Discontinued Operations—Adjustment of Loss Repeated in a Prior Period as a Discontinued Operation
Continuing the previous example, the sale of Today's Telecommunications’ pager division, which is a component of the entity, closed in the year subsequent to the fiscal year in which the assets and liabilities were classified as held‐for‐sale.
The actual sales price less costs to sell was $9,725.
The net carrying value of the assets and liabilities on the date of sale was $12,225.
The loss from operations from the end of the fiscal year to the date of sale was $2,045.
The tax rate is 40%.
The income statement presentation of discontinued operations would be:
| Discontinued operations (Note X) | |
| Loss from operations of discontinued division, net of tax of $818 | 1,227 |
| Gain on disposal of discontinued division, net of tax of $310 | 465 |
| Loss on discontinued operations | 762 |
The loss from operations of the discontinued pager division is the $2,045 less the tax effects of $818 ($2,045 × 40%). The loss on disposal is the difference between the carrying value of the division and its sales price less the loss recognized in the prior period. The carrying value of the division was $12,225; the sales price less costs to sell was $9,725, for an actual loss of $2,500. The loss recognized in the prior period was $3,275, so an adjustment of $775 ($2,500 less $3,275) is necessary. The tax effects on the adjustment are $310 ($775 × 40%), so the net adjustment is a gain of $465 ($775 – $310).
Example 2.5: Discontinued Operations Reporting—in Periods after the Sale, Including Adjustment for Contingency
The Hewitt Candy Company sells its entire candy cane production line, recognizing a gain of $155,000 on the transaction prior to applicable taxes of $54,000. During the year in which the sale was completed, Hewitt lost $23,000 on its operation of the candy cane line, while it also lost $72,000 during the preceding year. Applicable tax reductions during these years were $8,000 and $25,000, respectively. It reports these results in the following portion of its income statement:
| 20X0 | 20X1 | |
| Discontinued operations: | ||
| Loss from operations of discontinued candy cane division (net of applicable taxes of $25,000 and $8,000) | $(47,000) | $(15,000) |
| Gain on disposal of candy cane division (net of applicable taxes of $54,000) | — | 101,000 |
A clause in the sale agreement stipulates that Hewitt must reimburse the buyer for any maintenance problems found in the equipment. In the following year, the two parties negotiate a payment by Hewitt of $39,000 to address claims made under this clause. The applicable tax reduction associated with this payment is $14,000. It reports these results in the following portion of its income statement:
| 20X0 | 20X1 | 20X2 | |
| Discontinued operations: | |||
| Loss from operations of discontinued candy cane division (net of applicable taxes of $25,000 and $8,000) | $(47,000) | $(15,000) | ‐‐ |
| Gain on disposal of candy cane division (net of applicable taxes of $54,000) | ‐‐ | 101,000 | ‐‐ |
| Adjustment to gain on disposal of candy cane division (net of applicable taxes of $14,000) | ‐‐ | ‐‐ | $(25,000) |
Example 2.6: Discontinued Operations—Note Disclosure in Years Subsequent to the Year in Which the Discontinued Operation Was Classified as Held for Sale
In the fourth quarter of fiscal 20X0,
