ACTG Required: Complete the requirements outlined in the following case develope

Question

ACTG Required: Complete the requirements outlined in the following case developed by the Ernst & Young Foundation. Discontinued operations Diversified Holdings Inc. Background Diversified Holdings Inc. (DHI), a calendar-year company, operates three separate businesses. In September 2014, DHI decided to make a strategic shift in its business and sell its candy segment because its revenues and earnings were declining due to health-conscious consumers. The Chocolate House (TCH) subsidiary represents the entire candy segment. You have been asked to help determine the appropriate accounting treatment related to this decision. In your analysis, you should consider the following additional information:

DHI engaged a broker to help determine the value of the candy segment and to help locate a buyer. The broker indicated that given the age of the property, plant and equipment, the candy segment likely could be sold in less than a year if the offering price was $200 million.

This offering price would also allow DHI to fully recover the cost of TCH’s inventory. DHI considered this a reasonable value for these operations. DHI obtained Board approval to sell TCH for $200 million in November 2014.

The Board was informed that the estimated cost of selling TCH was $10 million.

On December 1, 2014, DHI publicly announced its intention to dispose of its candy segment. At this time, DHI informed the broker that TCH was available for immediate sale. Prior to year-end, the broker was actively seeking buyers.

Management has concluded that TCH should be accounted for as a discontinued operation.

Relevant financial information as of December 31 is provided on the following page for DHI and TCH.

All intercompany eliminations are already reflected in DHI’s consolidated financial information. The effective income tax rate in both 2013 and 2014 is 50%. For purposes of this analysis, do not consider any required segment disclosures.

Required

Q1) Provide and record the journal entries required for TCH’s remeasurement.

Q2) Draft the required disclosures and revisions to the comparative consolidated financial statements assuming DHI reports using US GAAP.

(All $ amounts in millions)

Consolidated DHI ---------------------------------------TCH Statement of financial position

2014 2013 ----------------------------------------------------2014 2013

Cash

$ 20 $ 30--------------------------------------------- $ (30) $ 10

Inventory

360 380 ---------------------------- 80 50

PP&E

450 460 ------------------------------------ 200 210

Liabilities

100 90 ---------------------------------------20 20

Equity

730 780-------------------------------- 230 250

Income statement

Revenue

1,700 1,750------------------- 500 600

Expenses

(1,400) (1,350) -------------------(540) (580)

Pretax income (loss)

300 400 -------------------(40) 20

Income tax expense (benefit)

(150) (200) -------------------20 (10)

Net income (loss)

$ 150 $ 200------------------- $ (20) $ 10

Explanation / Answer

Answer 1 :-

1)

Liabilities Dr xxxx

Assets Cr xxxx

Loss on TCH Cr xxxxx

2)

Cost of realisation Dr xxxx

Profit & Loss Cr xxxx

3)

Loss on TCH Dr xxxx

To Profit & Loss Cr xxxx

Answer 2 :-

Additional disclosure

The Summary of Board Decisions also notes that entities would be required to disclose the following for all other discontinued operations:

1.   The pretax profit (loss) of the discontinued operation for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

2.   The major line items constituting the pretax profit (loss) of the discontinued operation for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

3.   The operating and investing cash flows of the discontinued operation for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

4.   If the discontinued operation includes a noncontrolling interest, the pretax profit (loss) attributable to the parent for the periods that the results of operations of the discontinued operation are reported in the statement of comprehensive income

5.   The carrying amount(s) of the major classes of assets and liabilities included as part of a discontinued operation for all periods that the discontinued operation is classified as held for sale in the statement of financial position.

Further, the Board tentatively decided to add two new disclosure requirements related to the disposal of an individually material component of a public entity that does not meet the definition of a discontinued operation. Such entities would be required to disclose:

1.   The pretax profit or loss attributable to the individually material component . . . for the period in which it is sold or classified as held for sale and for all prior periods presented in the statement of comprehensive income

2.   If the component . . . includes a noncontrolling interest, the profit or loss attributable to the parent for the period in which it is sold or classified as held for sale and for all prior periods presented in the statement of comprehensive income.

Nonpublic entities would be required to include the same information, but the requirement would be limited to the annual period when the component is classified as held for sale or sold.

Income from continuing operations before income taxes $380 Income taxes (190) Income from continuing operations $190 Discontinued operations Loss from operations of discontinued business component (190) Income tax benefit 95 Loss on discontinued operations (95) Net income $95

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