🎥+✏️🎯Discontinued Operations CPA Exam Question Solved by Farhat🟢

Responses

1. 

   Martavious Moates 26 January 2024

   If the selling occurred in year 4, why did we have to retroactively apply the operating loss for year 3?

   1. 

      Maroun, CPA 26 January 2024

      Hi Martavious,

      When a component of an entity is discontinued, U.S. GAAP requires that its results be separated from continuing operations for all periods presented in the financial statements. This is mandated by the Financial Accounting Standards Board (FASB) under ASC 205-20, “Presentation of Financial Statements—Discontinued Operations.”

      Under these guidelines, even if the operation was discontinued in year 4, its results for year 3 must be presented as if the operation was discontinued at the beginning of year 3. This helps in providing a clear, consistent, and comparable view of the financial performance of the ongoing operations of the entity.

      Hope this makes sense!

      1. 

         Kathleen Murphy 6 November 2024

         Is this because the information is being reported in a comparative income statement for year 4 and year 3?

         1. 

            Maroun, CPA 9 November 2024

            Hi Kathleen,

            Yes, exactly! When presenting financial statements in a comparative format, U.S. GAAP requires that discontinued operations be shown consistently across all periods presented. This is to ensure that users of the financial statements have a comparable view of ongoing operations without the discontinued component, even if the actual sale or discontinuation happened in year 4. By retrospectively reclassifying the results for year 3, the comparative income statement provides a clear, side-by-side view of continuing operations for both years, enhancing transparency and comparability.

            Hope this helps!

      2. 

         Kashif Qureshi 5 February 2026

         Hello,
         Is income from continuing operations of year 3 also restated, as it includes operating results of discontinued operation in it.

         1. 

            Maroun, CPA 9 February 2026

            Hello Kashif,

            Yes. In a comparative income statement, the prior-year amounts are reclassified (recast) to present the discontinued component separately in each year shown.

            Thus, for Year 3:
            – The segment’s operating loss is removed from “income from continuing operations” and reported in discontinued operations (net of tax).

            – As a result, Year 3 income from continuing operations increases (because it no longer includes the discontinued segment).

            Important: this is a presentation reclassification. It does not change Year 3 total net income; it only changes where that segment’s results are reported.

            Hope this helps!