San Sebastian College Recoletos

Canlubang Campus

Financial Management II

DISCONTINUED OPERATION AND NONCURRENT ASSET HELD FOR SALE

1. Arvin Company is a diversified entity with nationwide interests in commercial real estate development
banking, mining and food distribution. The food distribution division was deemed to be inconsistent with
the long-term direction of the entity. On October 1, 2013, the board of directors voted to approve the
disposal of this division. The sale is expected to occur in August 2014. The food distribution had the
following revenue and expenses in 2013: January I to September 30, revenue of P35,000,000 and
expenses of P25,000,000; October 1 to December 31, revenue of P10,000,000 and expenses of
P12,000,000.

The carrying amount of the division's assets on December 31, 2013 was P50,000,000 and the recoverable
amount was estimated to be P55,000,000. The sale contract required the entity to terminate certain
employees incurring an expected termination cost of P1,000,000 to be paid by December 15, 2014.
Income tax rate is 30%. What amount should be reported as income from' discontinued operations for
2013?

a. 5,600,000
b. 9,100,000
c. 4,900,000
d. 8,400,000

2. On November 1, 2013, Albert Company committed to a plan to dispose of a major subsidiary. The
disposal met the requirements for classification as discontinued operation. The carrying amount of the
subsidiary was P8,000,000 and management estimated the fair value less cost of disposal at P6,500,000,
The subsidiary had an operating loss of P2,000,000. What amount should be presented as pretax loss from
discontinued operation for the current year?

a. 3,500,000
b. 1,500,000
c. 2,000,000
d. 0

3, Warmae Company accounted for noncurrent assets using the cost model. On July 1, 2013, the entity
classified an equipment as held for sale. At that date, carrying amount was P5,000,000, the fair value was
estimated at P3,500,000 and the cost of disposal at P100,000. On December 31, 2013, the equipment was
sold for net proceeds of P2,500,000. What amount should be included as an impairment loss for 2013?

a. 1,600,000
b. 2,500,000
c. 1,500,000
d. 900,000

4. Vincent Company accounted for noncurrent assets using the revaluation model. On October 1, 2013,
the entity classified a land as held for sale. At that date, the carrying amount of the land was P5,000,000
and the balance in the revaluation surplus was P1,500,000. At same date, the fair value of the land was
estimated at P5,500,000 and the cost of disposal at P100,000. The land was sold on January 31, 2014 for
6,000,000. What amount should be reported as gain on disposal of land in 2014?

a. 1,000,000
b. 2,600,000
c. 500,000
d. 600,000

Page 1 of 2
5. Russel Company, a parent entity, approved on December 1, 2013 a plan to sell a subsidiary. The sale is
expected to be completed on March 31, 2014. The year-end is December 31, 2013 and the financial
statements were approved on March 1, 2014. The subsidiary had assets with carrying amount of
P15,000,000 including goodwill of P1,500,000 on December 31, 2013. The subsidiary made an operating
loss of P3,000,000 from January 1 to March 1, 2014 and is expected to make a further loss of P2,000,000
up to the date of sale.

At the date of approval of the financial statements, the entity was in negotiation for the sale of the
subsidiary but no contract had been signed. The entity expected to sell the subsidiary for P9,000,000 and
to incur cost of disposal of P500,000. The value in use of the subsidiary was estimated to be P
10,000,000.

In the December 31, 2013 statement of financial position, what is the measurement of the subsidiary
classified as a "disposal group held for sale"?
a. 15,000,000
b. 10,000,000
c. 9,000,000
d. 8,500,000

6. Regina Company purchased an equipment for P5,000,000 on January 1, 2013. The equipment had a
useful life of 5 years with no residual value. On December 31, 2013, the entity classified the asset as held
for sale. On such date, the fair value less cost of disposal of the equipment was P3,500,000.

On December 31, 2014, the entity believed that the criteria for classification as held for sale can no longer
be met. Accordingly, the entity decided not to sell the asset but to continue to use it. On December 31,
2014, the fair value less cost of disposal of the equipment was P2,700,000.

1. What amount of impairment loss should be recognized in 2013?

a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
2. What amount should be included in profit or loss in 2014 as a result of the reclassification of
the equipment to property, plant and equipment?
a. 800,000 gain
b. 800,000 loss
c. 300,000 gain
d. 300,000 loss

3. What is the depreciation for 2015?

a. 1,000,000
b. 875,000
c. 900,000
d. 675,000

***END***

Page 2 of 2