Chapter 7 practice

A component need not be a separate legal entity; distinguishable operations and cash flows are the relevant boundary.

The separate operating and financial information supports identifying distinguishable operations and cash flows.

Component status is only the first condition; disposal status and a qualifying strategic shift are still required.

Separate measurement does not establish that the held-for-sale criteria have been met.

Answer: b

Choice B. The records and operating facts support a component conclusion. They do not, by themselves, establish disposal status or a strategic shift.

Management’s label is evidence of how it views the business, but the label does not establish the accounting boundary.

The component condition must be addressed before moving to the strategic-shift condition.

Owning assets does not demonstrate that the related operations and cash flows can be clearly distinguished.

The facts do not yet establish the component boundary; additional operating and financial evidence is needed.

Answer: d

Choice D. A name is not enough. The analysis needs facts showing that operations and cash flows can be distinguished from the rest of the entity.

A completed transfer establishes disposal status; the next classification question is whether the disposal represents the required strategic shift.

The six criteria apply to a planned sale that is not yet complete, not to a completed disposal.

Cash collection does not determine whether control of the operation was transferred.

Classification is assessed using conditions at the reporting date; no automatic one-period delay applies.

Answer: a

Choice A. Once the disposal is complete, do not re-test the asset as held for sale. Continue to the strategic-shift and major-effect analysis.

Commitment is necessary but does not replace the other held-for-sale criteria.

All applicable criteria must be met; one criterion does not outweigh another.

A required two-year renovation means the operation is not available for immediate sale in its present condition.

Labeling a cost does not cure the failure of the immediate-sale condition.

Answer: c

Choice C. A planned sale reaches held-for-sale classification only when all six criteria are satisfied.

Component and disposal status do not eliminate the strategic-shift and major-effect condition.

Selling one store while retaining the same market and business ordinarily does not establish the required strategic change.

OCI is used only when another accounting rule requires it; disposal does not create that treatment.

A nonrecurring event is not recorded directly in retained earnings merely because it may not recur.

Answer: b

Choice B. The sale remains in continuing operations because the third condition is not supported.

Exiting one of two major business lines with a large revenue contribution strongly supports both strategic shift and major effect.

GAAP does not establish a 50% bright-line threshold for this judgment.

Classification does not depend on whether the disposal produces a gain or a loss.

An entity need not cease all operations for a disposal to have a major strategic effect.

Answer: a

Choice A. The nature of the exit and its significance to consolidated operations support the conclusion; no single percentage mechanically decides it.

Magnitude may matter to materiality, but it does not by itself establish a strategic shift.

Being a long-lived asset does not decide whether its disposal changes the entity’s strategy.

Timing establishes the reporting period, not the strategic significance of the disposal.

Continuing the same network directly contradicts the idea that the disposal changed the company’s strategy in a major way.

Answer: d

Choice D. The decisive issue is what changed in the business, not merely how large the accounting loss appears.

A geographic exit can qualify, but the label alone is not conclusive.

There is no universal 10% cutoff that replaces judgment about major effect.

Both the qualitative change in operations and the quantitative effect must be evaluated and documented.

Uncertainty about classification does not create an OCI treatment.

Answer: c

Choice C. The operating changes are meaningful evidence, but the major-effect conclusion still requires a supported judgment rather than a mechanical percentage.

This uses only cost to sell and ignores the decline from carrying amount to fair value.

This compares carrying amount with fair value but omits cost to sell.

Fair value less cost to sell is $680,000, which is $80,000 below the $760,000 carrying amount.

Held-for-sale measurement can require a loss before the sale occurs.

Answer: c

Choice C. Measure at the lower of $760,000 carrying amount or $680,000 fair value less cost to sell, producing an $80,000 loss.

Initial classification does not create a write-up above carrying amount.

The lower amount is the $420,000 carrying amount, so no initial gain is recognized.

GAAP does not split the unrealized increase in half.

The asset remains recognized and is measured under the held-for-sale model.

Answer: b

Choice B. Initial held-for-sale classification uses the lower amount and therefore does not recognize the $45,000 increase.

The recovery cannot exceed the cumulative loss recognized under the held-for-sale model.

The excess over the prior loss is not the recognized amount.

The no-initial-write-up rule does not prohibit a limited recovery of a previously recognized loss.

The gain is capped at the $90,000 cumulative prior loss.

Answer: d

Choice D. A subsequent increase can reverse prior held-for-sale losses, but it cannot produce a carrying amount above the permitted ceiling.

Held-for-sale measurement shifts the recovery premise from use to sale, so continued allocation over a use period would conflict with that measurement.

The asset may still be usable; classification does not mean its physical life has ended.

Depreciation is not reclassified to OCI.

The seller continues to recognize the asset until the applicable derecognition event.

Answer: a

Choice A. The measurement basis now reflects recovery through sale, so the long-lived asset is no longer depreciated as though it will be recovered through continued use.

A tax benefit reduces a loss; it is not added to make the loss larger.

This ignores the related tax benefit.

The $60,000 benefit reduces the $240,000 pretax loss to a $180,000 net-of-tax loss.

The tax benefit is only one part of the reported discontinued-operation amount.

Answer: c

Choice C. Report a $180,000 loss: $240,000 pretax loss less the $60,000 tax benefit.

The combined pretax result is a $120,000 loss; the $30,000 tax benefit reduces it to a $90,000 net loss.

This is the combined pretax loss before the related tax benefit.

This subtracts the tax benefit from the operating income rather than from the combined pretax result.

This adds the operating income and tax benefit to the sale loss instead of combining their signed effects.

Answer: a

Choice A. Combine the $70,000 income and $190,000 loss to obtain a $120,000 pretax loss, then apply the $30,000 benefit to report a $90,000 net loss.

Comparative presentation is not limited to the year in which classification occurs.

The comparative statements separate the discontinued component’s results for all periods presented.

The accounting does not route the current-year result directly to retained earnings.

The net-of-tax result remains on the face of the income statement rather than disappearing into the note.

Answer: b

Choice B. Comparative presentation helps readers see continuing operations on a consistent basis across all periods shown.

The presentation line includes the disposal group’s assets, even though different guidance may measure individual items.

Assets and liabilities are not ordinarily offset into a single net amount.

Held-for-sale classification changes presentation before the sale closes when the applicable conditions are met.

The group’s assets and liabilities appear separately, with appropriate prior-period presentation when required.

Answer: d

Choice D. Measurement may come from several GAAP topics, but presentation captures all assets and liabilities of the disposal group in separate lines.

A name does not explain the amount or the economics of the disposal.

Proceeds alone do not explain operating results, carrying amounts, taxes, or gains and losses.

These disclosures connect the compact face amount to its underlying operating, disposal, tax, and cash-flow effects.

Audit status does not replace the required information about what the reported line contains.

Answer: c

Choice C. The note disaggregates and explains the single face amount so readers can evaluate what happened and what cash flows were involved.

Unusual or infrequent items remain in continuing operations unless another rule prescribes a different location.

Unusual does not satisfy the component, disposal-status, and strategic-shift conditions.

Unexpected events do not automatically enter OCI.

Nonrecurrence does not justify bypassing net income.

Answer: a

Choice A. The event’s unusual nature affects how clearly it should be presented and disclosed, not whether it leaves continuing operations.

Gross presentation does not mechanically increase income.

Users may care about both the operational loss and the source and uncertainty of recovery even when the arithmetic nets to zero.

An insurance recovery is not automatically an OCI item.

Neither a loss nor an insurance recovery establishes the discontinued-operation conditions.

Answer: b

Choice B. A net zero can conceal the size and nature of both the damage and the recovery; transparent presentation helps users see those separate effects.

Disclosure does not change whether the discontinued-operation criteria are met.

A broad caption can make note detail more important, not unnecessary.

Unusual items do not appear below net income merely because they are unusual.

The face and note work together: one locates the effect and the other explains its composition and cause.

Answer: d

Choice D. Presentation and disclosure have different jobs and should be read together.