On Nov. 1, 2010, Banana Corporation management decided to discontinue operation of its Rocketeer Division and approved a formal plan to dispose of the division. Banana is a successful corporation with earnings of $150 million or more before tax for each of the past five years. The Rocketeer Division, a major part of Banana's operations, is being discontinued becaise it has not contributed to this profitable performance.
The division's main assets are the land, building, and equipment used to manufacture engine components. The land, building, and equipment had a net book value of $96 million on Nov. 1, 2010.
Banana's management has entered into negotiations for a cash sale of the division for $87 million (net costs to sell). The expected sale date and final disposal date of the division is expected to be Jul 1, 2011. Banana Corporation has a fiscal year ending May 31. The results of the operations for the Banana Corporation for the 2010-2011 fiscal year and the estimated results for Jun 2011 are presented below. The before-tax losses after Oct. 31, 2010, are calculated without depreciation on the building and equipment.
Period Before-Tax Loss
- Jun 1, 2010 to Oct 31, 2010 $(6,100,000)
- Nov 2, 2010 to May 31, 2011 (3,900,000)
- Jun 1 to 30, 2011 (estimated) (700,000)
The Rocketeer Division will be accounted for a discontinued operation on Banana's financial statement for the year ended May 31, 2011. Banana's tax rate is 25% on operating income and all gains and losses. Banana prepares financial statements in accordance to IFRS>
1. Explain how the Rocketeer Division's assets woul be reported in Banana Corporation's balance sheet as at May 31, 2011.
2. Explain how the discontinued operations and pending sales of the Rocketeer Division would be reported on Banana Corporation's income statement for the year ende May 31, 2011.
3. On Jul 5, 2011, Banana Corporation disposes of the division assets at an adjusted price of $84 million. Explain how the discounted operations and sale of the Rocketeer Division would be reported in Banana Corporation's income statement for the year ended May 31, 2012. Assume Jun 2011 operating loss is the same as estimated.
4. Assume that Banana Corporation management was debating whether the sale of the Rocketeer Division qualified for discontinued operations accounting treatment under IFRS. List specific factors or arguments that management would use to suggest that the Rocketeer Division should be treated as a discontinued operation. Why might management have a particular preference about which treatment is given? From an external's perspective, what relevance does the presentation of the discontinued operation have when interpreting the financial result?