Joanne M. Flood - Wiley GAAP - Financial Statement Disclosure Manual

The tax rate is 40%.

The income statement presentation of discontinued operations would be:

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.

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:

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).

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:

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:

In the fourth quarter of fiscal 20X0, the Company decided to discontinue operations of the Up Fashion division. This represents a strategic shift in operations that has a major impact on the Company's operations and financial results and has been accounted for as discontinued operations This strategy will allow the Company to focus its efforts on improving Little Miss Division sales and profitability, expanding internationally, and continuing to develop its miss tween business. The Company closed 17 Up Fashion stores in the first fiscal quarter of 20X1 and during the second fiscal quarter of 20X1, closed the remaining 18 Up Fashion stores. The results of the Up Fashion stores closed to date, net of income tax benefit, which consists of 35 and 49 stores for the fiscal years ended July 2, 20X1 and July 3, 20X0, respectively, have been presented as a discontinued operation in the accompanying consolidated statements of operations and comprehensive income (loss) for all periods presented and are as follows:

In the second quarter of 20X2, following termination of the Home Décor agreement, the Company disclosed its intention to explore strategic alternatives regarding its European Home Decor business of the International Division.

On September 23, 20X2, the Company announced that it had received an irrevocable offer from Davis Investors, a subsidiary of The Lawson Group (the “Purchaser”) to acquire the Company's European business operations (the “Home Décor Business”). The transaction was structured as an equity sale with the Purchaser acquiring the Home Décor Business with its operating assets and liabilities.

In addition to approving the sale of the Home Décor Business in the third quarter of 20X2, the Company's Board of Directors approved a plan to sell substantially all of the remaining operations of the International Division. On December 31, 20X2, the Company closed the sale of the Home Décor Business contemplated by the Sale and Purchase Agreement (the SPA) dated November 22, 20X2 as amended to complete the sale). Approximately $70 million has been accrued at December 31, 20X2 under a working capital adjustment provision. The draft working capital adjustment submitted by the Company to the Purchaser is subject to a dispute resolution provision as provided for in the SPA. The Company is actively marketing for sale the businesses in South Korea, mainland China, Australia, and New Zealand and expects to complete the dispositions within the one year period associated with held for sale assets. Collectively, the European Home Décor Business sale and other planned dispositions represent a strategic shift that has a major impact on the Company's operations and financial results and has been accounted for as discontinued operations. The retained sourcing and trading operations of the former International Division are presented as Other in Note X, Segment Information.