NONCURRENT ASSET HELD FOR SALE

DISCONTINUED OPERATION

Problem 4-1(IFRS)

Dana Company accounts for noncurrent assets using the cost model. On October 1, 2010, Dana
classified a noncurrent asset as held for sale. At that date, the asset’s carrying amount was P3,200,000.
Its fair value was estimated at P2,200,000 and the cost to sell at P200,000. On December 15,2010, the
asset was sold for net proceeds of P1,850,000.

What amount should be included as an impairment loss in Dana’s statement of comprehensive income
for the year ended December 31, 2010?

a. 1,000,000
b. 1,200,000
c. 1,350,000
d. 0

Solution 4-1 Answer b

Carrying amount 3,200,000

Fair value less cost to sell(2,200,000-200,000) 2,000,000
Impairment loss 1,200,000

PFRS5 provides that an entity shall measure a noncurrent asset or disposal group classified as held for
sale at the lower of carrying amount and fair value less cost to sell.

Sales price 1,850,000

Carrying amount – December 15, 2010 2,000,000
Loss on disposal ( 150,000)

Problem 4-2 (IFRS)

ARLENE Company accounts for noncurrent assets using the cost model. On October 30,2010, Arlene
classified a noncurrent asset as held for sale. At that date, the asset’s carrying amount was P1,500,000,
its fair value was estimated at P1,100,000 and the cost to sell at P150,000. On November 20, 2010, the
asset was sold for the net proceeds of P800,000. What amount should be included as loss on disposalin
Arlene’s statement of comprehensive income for the year ended December 31, 2010?

a. 550,000
b. 700,000
c. 150,000
d. 0
Solution 4-2 Answer c

Carrying amount 1,500,000

Fair value less cost to sell (1,100,000-150,000) 950,000
Impairment loss 550,000

Sales price 800,000

Carrying amount on November 20, 2010, date of sale 950,000
Loss on disposal ( 150,000 )

Problem 4-3 (IFRS)

Coral Company accounts for noncurrent assets using the cost model. On July 31, 2010, Coral classified a
noncurrent asset as held for sale. At that date, the asset’s carrying amount was P1, 450,000, its fair
value was estimated at P2, 150,000 and the cost to sell at P150, 000. The asset was sold on January 31,
2010. At what amount should the asset be measured in Coral’s statement of financial position on
December 31, 2010?

a. 2,000,000
b. 2,150,000
c. 2,120,000
d. 1,450,000

Solution 4-3 Answer d

Carrying amount – lower than fair value less cost to sell 1,450,000

Problem 4-4 (IFRS)

LYNX Company is planning to dispose of a collection of assets. The entity designated these assets as a
disposal group. The carrying amount of these assets immediately before classification as held for sale
was P2, 000,000. Upon being classified as held for sale, the assets were revalued to P1, 800,000. The
entity feels that it would cost P100, 000 to sell the disposal group. What would be the carrying amount
of the disposal group in the entity’s accounts after its classification as held for sale?

a. 2,000,000
b. 1,800,000
c. 1,700,000
d. 1,900,000
Solution 4-4 Answer c

Fair value 1,800,000

Cost to sell 100,000
Fair value less cost to sell – lower 700,000

Problem 4-5

On April 1, 2010, Brandy Company has a machine with a cost of P1, 000,000 and accumulated
depreciation of P750, 000. On April 1, 2010, Brandy classified the machine as” held for sale” and decided
to sell the machine within 1 year. On April 1, 2010, the machine had an estimated selling price of P100,
000 and a remaining useful life of 2 years. It is estimated that selling cost associated with the disposal of
the machine will be P10, 000. On December 31, 2010, the estimated selling price of the machine had
increased to P150, 000 with estimated selling cost of P20, 000.

How much should be recognized as gain on reversal of impairment on December 31, 2010?

a. 93,750
b. 73,750
c. 60,000
d. 40,000

Solution 4-5 Answer d

Cost 1,000,000
Accumulated depreciation 750,000
Carrying amount – April 1, 2010 250,000
Fair value less cost to sell-April 1, 2010 (100,000-10,000) 90,000
Impairment loss – April 1, 2010 160,000

Impairment loss 160,000

Accumulated depreciation 160,000

Fair value less cost to sell – December 31, 2010 (150,000-20,000) 130,000
Fair value less cost to sell – April 1, 2010 90,000
Gain on reversal of impairment 40,000

Accumulated depreciation 40,000

Gain on reversal of impairment 40,000

PFRS5 provides that an entity shall not depreciate a noncurrent asset while it is classified as held for sale
or while it is part of a disposal group classified as held for sale.
Problem 4-6 (IFRS)

On January 1, 2010, Villa Company classified as held for a sale anon current asset with a carrying amount
of P5, 000,000. On this date, the asset is expected to be sold for P4, 600, 000. Reasonable disposal cost
to be incurred on sale is expected at P200, 000. By December 31, 2010, the asset had not been sold and
management after considering its options decided to place back the noncurrent asset into operations.
On that date, the entity estimated that the noncurrent asset is expected to be sold at P4, 300, 000 with
disposal cost of P50, 000. The carrying amount of the noncurrent asset is P4, 000, 000 on December 31,
2010 if the noncurrent asset is not classified as held for sale.

What is the carrying amount of the asset that should be reported in the statement of financial position
on December 31, 2010?

a. 5, 000, 000
b. 4, 000, 000
c. 4, 400, 000
d. 4, 250, 000

Solution 4-6 Answer b

Carrying amount – December 31, 2010 4, 000, 000

Fair value less cost to sell – December 31, 2010 4, 250, 000
(4,300,000 – 50,000)

Under PFRS 5, an entity shall measure a noncurrent asset that ceases to be classified as held for sale at
the lower of the carrying amount on the basis that the asset had never been classified as held for sale,
and its recoverable amount on the date of the decision not to sell.

Problem 4-7 (IAA)

Booker Company committed to sell its comic book division (a component of the business) on September
1,2010. The carrying amount of the division was P4,000,000 and the fair value was P3,500,000. The
disposal date is expected to be June 1, 2011. The division reported an operating loss of P200,000 for the
year ended December 31, 2010. Ignoring income tax, what amount should be reported as loss from
discontinued operation in 2010?

a. 500,000
b. 200,000
c. 700,000
d. 0
Solution 4 – 7 Answer c

Operating loss for the year 200, 000

Impairment loss (4,00,000 – 3,500,000) 500, 000
Loss from discontinued operation 700, 000

Problem 4 – 8 (IAA)

Enron Company decided on August 1, 2010 to dispose of a component of its business. The component
was sold on November 30, 2010. Enron’s income for 2010 included income of P5,000,000 from
operating the discontinued segment from January 1 to the date of sale. Enron incurred a loss on the
November 30 sale of P4,500,000.

Ignoring income tax, what amount should be reported in the 2010 income statement as income or loss
under “discontinued operation”?

a. 4,500,000 loss
b. 5,000,000 income
c. 500,000 loss
d. 500,000 income

Solution 4 – 8 Answer d

Operating income 5, 000, 000

Loss on disposal (4, 500, 000)
Income from discontinued operation 500, 000

Problem 4 – 9 (PFRS 5)

Xavier Company has three segments, A, B, C. Segment C, the closing division, is deemed inconsistent
with the long-term direction of the entity. Management has decided to dispose of Segment C. on
November 15, 2010; the board of directors of Xavier Company voted to approve the disposal and
announcement was made. On that date the carrying amount of Segment C’s net assets was P90,
000,000 and the fair value less cost to sell was P70, 000,000. Segment C’s revenue and expense for
2010, respectively, were P50, 000,000 and P32, 000,000, including an interest of P5, 000,000
attributable to Segment C.

There was no further impairment of assets between November 15 and December 31, 2010.
Before income tax, how much is the income or loss from discontinued operation to be reported in the
2010 income statement?

a. 13,000,000 income
b. 18,000,000 income
c. 30,000,000 income
d. 2,000,000 loss

Solution 4 – 9 Answer d

Revenue 50, 000,000

Expenses (32, 000,000)
Impairment loss (20, 000,000)
Loss from discontinued operation ( 2, 000,000 )

Carrying amount of net assets 90, 000,000

Fair value less cost to sell 70, 000,000
Impairment loss 20, 000,000

Problem 4 – 10 (PFRS 5)

On September 30, 2010, when the carrying amount of the net assets of a business segment was P70,
000,000, Young Company signed a legally binding contract to the sell the business segment. The sale is
expected to be completed by January 31, 2011 at a selling price of P60, 000,000. In addition, prior to
January 31, 2011, the sale contract obliges young Company to terminate the employment of certain
employees of the business segment incurring an expected termination cost of P2, 000,000 to paid on
June 30, 2011. The segment’s revenue and expenses for 2010 were P40, 000,000 and p45, 000,000
respectively. Before income tax, how much will be reported as loss from discontinued operation for
2010?

a. 17,000,000
b. 12,000,000
c. 15,000,000
d. 7,000,000
e.

Solution 4 – 10 Answer a

Revenue 40,000,000
Expenses (45,000,000)
Impairment loss (10,000,000)
Termination cost ( 2,000,000 )
Loss from discontinued operation (17,000,000)
Selling price 60,000,000
Carrying amount of net assets (70,000,000)
Impairment loss (10,000,000)

Problem 4 – 11 (PFRS 5)

Zebra Company is a diversified entity with nationwide interests in commercial real estate, banking,
mining and food distribution. The food distribution division was deemed to be inconsistent with the
long-term direction of the entity. On October 1 2010 the board of directors voted to approve the
disposal of this division. The sale is expected to occur in August 2011. The food distribution had the
following revenue and expenses in 2010: January 1 to September 30, revenue of P35,000,000 and
expenses of P27,000,000; October 1 to December 31, revenue of P15,000,000 and expenses of
p10,000,000. The carrying amount of the division’s net assets at December 61, 2010 was P5,600,000 and
the fair value less cost to sell was P56,500,000. The sale contract requires Zebra to terminate certain
employees incurring an expected termination cost of P4,000,000 to be paid by December 15, 2011.
Income tax rate is 30%.

In the income statement for the year ended December 31, 2010, what amount should be reported as
income from discontinued operation?

a. 9,500,000
b. 6,650,000
c. 9,000,000
d. 6,300,000

Solution 4 – 11 Answer d

Revenue – January 1 to December 31 50,000,000

Expenses - January 1 to December 31 (37,000,000)
Termination cost ( 4,000,000 )
Income before tax 9,000,000
Income tax (30% x 9,000,000) 2,700,000
Income from discontinued operation 6,300,000

Fair value less cost to sell 56,500,000

Carrying amount of the net assets 56,000,000
Expected gain – not recognized 500,000
Problem 4-12 (IAA)

Flame Company has two divisions, North and South =. Both qualify as business components. In 2010, the
decided to dispose of the assets and liabilities of division South and it is probable that the disposal will
be completed early next year. The revenue and expense of Flame Company for 2010 and 2009 are as
follows:

2010 2009

Sales-North 5,000,000 4,600,000

Total nontax expenses-North 4,400,000 4,100,000
Sales-South 3,500,000 5,100,000
Total nontax expenses-South 3,900,000 4,500,000

During the later part of 2010, Flame disposed of a portion of division South and recognized a pretax loss
of P2,000,000 on the disposal. The income tax rate for Flame Company is 30%.

What amount should be reported as loss from discontinued operation in 2010?

a. 2,000,000
b. 2,400,000
c. 1,400,000
d. 1,680,000

Solution 4-12 Answer d

Sales – South 3,500,000

Expenses – South 3,900,000

Operating loss ( 400,000)

Loss on disposal ( 2,000,000)

Total loss (2,400,000)

Tax saving (30% x 2,400,000) 720,000

Loss from discontinued operation (1, 680,000)

Problem 4-13 (IAA)

In 2010, Isuzu Company decided to discontinue its Electronics Division, a separately identifiable
component of Isuzu’s business. On December 31, 2010, the division has not been completely sold.
However, negotiations for the final and complete sale are progressing in appositive manner and it is
probable 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 Electronics Division:

Operating loss for the year 8,000,000

Loss on disposal of some Electronics Division assets
during 2010 500,000
Expected operating loss in 2011 preceding final disposal 1,000,000
Expected gain in 2011 on disposal division 2,000,000

How much should be reported as pretax loss from discontinued operation in 2010?

a. 8,000,000
b. 8,500,000
c. 9,500,000
d. 7,500,000

Solution 4-14 Answer b

Operating loss for the year 8,000,000

Loss on disposal in 2010 500,000

Pretax loss from discontinued operation 8,500,000

The expected operating loss in 2011 and expected gain on disposal in 2011 are not recognized in 2010.

Problem 4-15 (IFRS)

Mati Company, a parent entity, approved on December 1, 2010 a plan to sell it subsidiary. The sale is
expected to be completed on March 31, 2011. The year-end of Mati Company is December 31, 2010 and
the financial statements were approved on March 1, 2011. The subsidiary had net assets with carrying
amount of P15,000,000 including goodwill of P1,500,000 on December 31, 2010. The subsidiary made a
loss of P3,000,000 from January 1 to March 1, 2011 and is expected to make a further loss of P2,000,000
up to the date of sale.

At the date of approval of the financial statements, Mati was in negotiation for the sale of the subsidiary
for P9,000,000 and to incur cost of selling of P500,000. The value in use of the subsidiary was estimated
to be P10,000,000.
In the December 31, 2010 statement of financial position of Mati Company, what is the measurement of
the subsidiary which is considered as a “disposal group classified as held for sale”?

a. 15,000,000
b. 10,000,000
c. 9,000,000
d. 8,500,000

Solution 4-15 Answer d

Carrying amount of net assets 15,000,0000

Fair value 9,000,000

Cost to sell ( 500,000)

Fair value less to cost to sell 8,500,000

A noncurrent asset or disposal group classified as held for sale shall be measured at the lower of
carrying amount and fair value less to cost to sell.

Problem 4-16 (IFRS)

Purple Company has incorrectly classified its packaging operation as a disposal group held for sale and
as discontinued operation. For the year ended December 31, 2010, this disposal group incurred trading
loss after tax of P2,000,000 and the loss on remeasuring it to fair value less cost to sell was P1,500,000

How much of the disposal group’s losses should be included in profit or loss for the year ended
December 31, 2010?

a. 3,500,000
b. 2,000,000
c. 1,500,000
d. 0

Solution 4-16 Answer d

Operating loss 2,000,000

Loss on remeasurement to fair value less cost to sell 1,500,000

Included in profit or loss 3,500,000