I am having some trouble with the following question:
On March 31st, ABC Corp. announced that it had reached an agreement to sell its XYZ subsidiary. However, the closing transaction did not take place until September 30th of that same year. XYZ had a total net income of $22,000 for the quarter ending March 31st, and a total net income of $84,000 for the nine months ending September 30th. If the gain (net of taxes) on the sale was $327,000, how much should ABC report as its earnings from discontinued operations for the year ending December 31st? A) $62,000 B) $411,000 C) $389,000 D) $327,000
The Right Answer is c. Explanation: XYZ only became regarded as a discontinued operation after March 31st. Therefore, all results before that date would be regarded as part of normal operations. However, all figures after that date would constitute earnings from discontinued operations. While total net income for the year from XYZ was $84,000, $22,000 of that was while XYZ was part of normal operations. Thus, the difference [$84,000-$22,000 = $62,000] constitutes earnings from discontinued operations. Furthermore, the entire gain on the sale is grouped the same way. Therefore, the total earnings from discontinued operations is: $62,000 + $327,000 = $389,000.
Two things are not quite clear to me:
If I understood this correctly, the ’ measurement date’ would be March 31st and the time from then until the actual sale on September 30th is the ’ phaseout period’ (the terms ’ measurement date’ and ’ phaseout period’ are from Schweser notes and are not mentioned at all in the CFA curriculum). So everything income generated between ’ measurement date’ and ’ phaseout period’ is recorded as income from discontinued operations, correct? In this case $84,000-$22,000=$62,000.
Why are the ‘Gain on the Sale’ not reported under income from continuing operations as an unusual or infrequent item, since they include: gains or losses from the sale of assets or part of the business.
I do see why we report it under discontinued operations since in the CFA curriculum it says under discontinued operations:
“…When a company disposes of or establishes a plan to dispose of one of its component operations and will have no further involvement in the operation, the income statement reports separately the effect of this disposal as a “discontinued” operation under both IFRS and US GAAP…”
This clearly requires that all of the effects of the sale (income during phaseout and gain or loss from selling it) need to be aggregated under discontinued operations.
But I don’t see, when we would ever have a case of a sale of a part of the business that is part of unusual or infrequent items, since we seem to always make that part of discontinued operations.