On May 1, Tango Co. agreed to sell the assets of its Formal Wear Division to Top Hat Inc.

The following additional facts pertain to the transaction:

The Formal Wear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.

The book value of Formal Wear's assets totaled $48 million on December 31, 2021.

Formal Wear's operating income was a pre-tax loss of $10 million in 2021.

Tango's income tax rate is 25%.

Suppose that the Formal Wear Division's assets had not been sold by December 31, 2021, but were considered held for sale. Assume that the fair value of these assets was $40 million at December 31, 2021. In the income statement for the year ended December 31, 2021, Tango Co. would report discontinued operations of:-

This gives a net losses from discontinued of operations of $13.5m

After having deducted tax benefit of $4,5m

Explanation:

Kindly find attached spreadsheet showing of the computations from US GAAP's perspective

Mind the use of formulas highlighted before each calculation

For the year ended December 31, 2021, Tango would report:

Fair value of the assets = $40 million

Carrying Amount = $48 million

lower of the 2 values is fair value, which would reduce the carrying amount and result in impairment of $8 million which would be recognized in the income statement.

This expense is recognized in the income statement + pre-tax loss

= $8 million + $10 million = $18 million

less tax(25%) = $4.5 million

Total loss from discontinued operation = $18 million - $4.5 million = $13.5 million

Explanation:

As at December 31, 2021, the Division's assets were considered held for sale.

Therefore, the assets should be measured at the lower of carrying amount and fair value less costs to sell (IFRS 5 -Non-current Assets Held for Sale and Discontinued Operations) with a recognition of any arising impairment.

Any impairment loss that arises by using the measurement principles in IFRS 5 must be recognized in profit or loss.

answerembargo;