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Hi there, I have been going through practice questions and am confused why a figure is not included when reaching the correct answer for the question below (relating to discontinued operations) Please can somebody offer advise why?
At a board meeting (June 20X3) a company’s directors decided to close down a factory (by 30 September 20X3) and market both the building and plant for sale. This was made public, communicated to all affected parties and implemented by 30 September.
The factory’s plant had a carrying amount of $2.2 million, but is only expected to sell for $500,000, incurring $50,000 of selling costs. The factory itself is expected to sell for a profit of $1.2 million.
The question asks for the profit or loss on discontinued operations relating to PPE for the year ended 30 September 20X3.
I understand that $2.2million less ($500,000 – $50,000) provides the correct answer of a $1.75 million loss. However, had included $1.2 profit on the factory itself to reach my (incorrect) answer of a $550,000 loss.
Why is this $1.2 million not included? And hence, why is the $1.75m loss correct?
Any help would be greatly appreciated. – Thanks
Because the factory is not yet sold as at the year end … “The factory itself is expected to sell for a profit of $1.2 million.”
OK?
Thanks for your reply. Why do we still recognise the loss of the plant then, as the wording also stated “expected to sell”?
I understand that the plant’s carrying amount exceeds the recoverable amount (impairment loss), but am still unclear why we would treat these differently – neither have sold.
Accountants are taught to be cautious – we always anticipate losses and we never anticipate gains
“but am still unclear why we would treat these differently”
You may as well have asked why we treat provisions and contingencies differently for assets than for liabilities
Prudence!
OK?
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