In an effort to concentrate its resources in more profitable areas, Train Corpor

Question

In an effort to concentrate its resources in more profitable areas, Train Corporation recently sold its family cookbook segment but retained its restaurant segment. The disposal constitutes ____________. Question 20 options:

a) an extraordinary item

b) a discontinued operation, which should be treated as a prior period adjustment

c) a discontinued operation, which should be disclosed net-of-tax effects

d) a portion of income from continuing operations

e) an item which does not require disclosure

Explanation / Answer

Correct Answer is option c) a discontinued operation, which should be disclosed net-of-tax effect.

As per GAAP, definiation of discontinued operation, “a disposal of a component of an entity or a group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results” as determined when the component or group of components: (i) meets the criteria to be classified as held for sale; (ii) is disposed of by sale; or (iii) is disposed of other than by sale.

Interepretation of this, a component is a seperate major line of business or geographical area, if it has significant impact on a business. Also it should represent strategic shif in business and has major effect on company's operations and financial result.

Applying above definition, Family Cookbook segment is seperate component for Train Corporation and it is sold as a strategic shift since they want to focus on more profitable business. Hence it is discontiuned operation.

Disclosure, for discontinued operations in Statement of Comprehensive Income is post tax profit or loss of discontinued operation. Also, details of revenue, expenses pre-tax profit or loss and relevant tax expenses shall be disclosed by of Notes or in comprehensive income. It should be distinct from continuing operation.

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