On October 5, 2014, Diamond in the Rough Recruiting Group Inc.'s board of directors decided to dispose of the Blue Division. A formal plan was approved. Diamond derives approximately 7 5% of its income from its human resources management practice. The Blue Division gets contracts to perform human resources management on an outsourced basis. The board decided to dispose of the division because of unfavourable operating results.
Net income for Diamond was $91,000 for the fiscal year ended December 31, 2014 (after a charge for tax at 30% and after a writedown for the Blue assets). Income from operations of the Blue Division accounted for $4,200 (after tax)
of this amount.
Because of the unfavourable results and the extreme competition, the board believes that it cannot sell the business intact. Its final decision is to auction off the office equipment. The equipment is the division's only asset and has a carrying value of $25,000 at October 5, 2014. The board believes that proceeds from the sale will be approximately $5,000 after the auction expenses. Currently, the estimated fair value of the equipment is $8,000. T he Blue Division qualifies for treatment as a discontinued operation. Diamond prepares financial statements in accordance with ASPE.
Instructions
(a) Prepare a partial income statement for Diamond in the Rough Recruiting Group and the appropriate footnote that relates to the Blue Division for 2014. The income statement should begin with income from continuing operations before income tax.
(b) Explain how the assets would be valued and presented on the balance sheet.
(c) Explain how the assets would be valued and presented on the balance sheet if Diamond prepared financial statements in accordance with IFRS.
(d) From the perspective of an investor, comment on Diamond's quality of earnings if Diamond presented the Blue
Division as a discontinued operation, but did not have a formal plan in place to dispose of the division.