Question

On November 30, 2016, Pearman Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP, and was properly classified as held for sale on December 31, 2016, the end of the company's fiscal year. The division was tested for impairment and a $400,000 loss was indicated. The division's loss from operations for 2016 was $1,000,000. The final sale was expected to occur on February 15, 2017. What before-tax amount(s) should Pearman report as loss on discontinued operations in its 2016 income statement?

a) $1,400,000 loss.
b) $400,000 loss.
c) None
d) $400,000 impairment loss included in continuing operations and a $1,000,000 loss from discontinued operations.

Answer 1

Pearman Company must report a before-tax amount of $1,400,000 as the loss on discontinued operations in its 2016 income statement, which includes both the $400,000 impairment loss and the $1,000,000 operational loss.(option d)

Step-by-step explanation:

According to GAAP, when a division is classified as held for sale, impairment losses and operational losses for the period from that division must be reported in discontinued operations. In this case, Pearman Company should report both the loss from impairment, $400,000, and the operational loss, $1,000,000, on their 2016 income statement under discontinued operations. Therefore, the correct amount to report as a loss on discontinued operations for Pearman Company is:

$1,400,000 loss.

This includes the $400,000 impairment loss and the $1,000,000 loss from operations of the division that was held for sale.