Question

On October 1, 2018, American Medical Inc. adopted a plan to discontinue its generic drug division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by March 30, 2019. On December 31, 2018, the company's year-end, the following information relative to the discontinued division was accumulated:

Operating loss for 2018 $195 million Excess of book value over fair value, less costs to sell, at year-end 25 million
In its income statement for the year ended December 31, 2018, American would report a before-tax loss on discontinued operations of:
a. $170 million
b. $195 million
c. $220 million
d. All of these answers are incorrect

Answer 1

The before-tax loss on discontinued operations for American Medical Inc. is $220 million, which includes the operating loss of $195 million and excess of book value over fair value, less costs to sell, of $25 million.

The correct option is C.

Step-by-step explanation:

According to Generally Accepted Accounting Principles (GAAP) regarding discontinued operations, when a component of a business is discontinued, companies need to report the results from these operations separately. In this case, American Medical Inc. must report a loss from the discontinued generic drug division for the year ended December 31, 2018.

The before-tax loss on discontinued operations would include both the operating loss for 2018 and the excess of book value over fair value minus costs to sell. Therefore, the calculation would be as follows:

• Operating loss for 2018: $195 million
• Excess of book value over fair value, less costs to sell: $25 million

Adding both figures together:

$195 million (operating loss) + $25 million (excess of book value over fair value, less costs to sell) = $220 million total before-tax loss on discontinued operations.

Thus, the correct answer is c. $220 million.