On December 31, 20X2, the Board of Directors of Maxx Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division in 20X3. Maxx estimated that Alpha's 20X3 operating loss would be $500,000 and that the proceeds from the disposal of the segment's assets will be $300,000 less than their carrying amounts. Alpha's 20X2 operating loss was $1,400,000. Maxx's effective tax rate is 30%. In its 20X2 income statement, what amount should Maxx report as loss on disposal of discontinued segment?
Expected gains or losses from operations in future periods are not considered while accounting for discontinued operations, until the period of occurrence. Only exception being indirect recognition of expected losses via Impairment testing.
In the given scenario, Maxx estimated that Alpha's 20X3 operating loss would be $500,000 and that the proceeds from the disposal of the segment's assets will be $300,000 less than their carrying amounts.
As explained we will not consider estimated loss of $500,000, rather Alpha's 20X2 operating loss of $1,400,000 will be considered. In addition, when assets have carrying values that exceed their fair values, impairment losses will be recognized, which will also be included in discontinued operations since the assets are related to the discontinued segment.
In its 20X2 income statement, Maxx should report $1,400,000 loss from operations and the $300,000 impairment loss for a total of $1,700,000, which will be net of tax at a rate of 30% or $510,000.
Net loss on disposal of discontinued segment = $1,700,000 - $510,000 = $1,190,000.