On November 1, 2019, Campbell Corporation management decided to discontinue operation of its Rocketeer Division and approved a formal plan to dispose of the division. Campbell 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 Campbell’s operations, is being discontinued because 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 $42 million on November 1, 2019.

Campbell’s management has entered into negotiations for a cash sale of the division for $36 million (net of costs to sell). The sale date and final disposal date of the division is expected to be July 1, 2020. Campbell Corporation has a fiscal year ending May 31. The results of operations for the Rocketeer Division for the 2019–20 fiscal year and the estimated results for June 2020 are presented below.

The before-tax losses after October 31, 2019, are calculated without depreciation on the building and equipment.

Period .......................................................... Before-Tax Loss
June 1, 2019, to October 31, 2019 ................... $(2,500,000)
November 1, 2019, to May 31, 2020 ................. (1,600,000)
June 1 to 30, 2020 (estimated) .............................. (300,000)

The Rocketeer Division will be accounted for as a discontinued operation on Campbell’s financial statements for the year ended May 31, 2020. Campbell’s tax rate is 25% on operating income and all gains and losses. Campbell prepares financial statements in accordance with IFRS.

Instructions

a. Explain how the Rocketeer Division’s assets would be reported on Campbell Corporation’s statement of financial position as at May 31, 2020.

b. Explain how the discontinued operations and pending sale of the Rocketeer Division would be reported on Campbell Corporation’s income statement for the year ended May 31, 2020.

c. On July 5, 2020, Campbell Corporation disposes of the division’s assets at an adjusted price of $40 million. Explain how the discontinued operations and sale of the Rocketeer Division would be reported on Campbell Corporation’s income statement for the year ended May 31, 2021. Assume the June 2020 operating loss is the same as estimated.

d. Digging Deeper Assume that Campbell 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 user’s perspective, what relevance does the presentation of the discontinued operation have when interpreting the financial results?