DIY LtdOwns 20 Subsidiary Companies

question 27

Multiple Choice

DIY Ltd.owns 20 subsidiary companies.Most of the subsidiaries are hardware stores operating in rural areas.One of the subsidiaries has been having financial difficulties and has finally decided to cease operations.Which of the following statements about DIY's consolidated financial statements is true?

• A)DIY should report this as a discontinued operation.
• B)DIY should report any losses from this as part of its normal operating activities.
• C)Whether DIY treats this as a discontinued operation or not depends on if it used the cost method or the equity method to record the subsidiary.
• D)DIY is not required to disclose anything about this closure.

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Definitions:

Section 1245 Gain

Income derived from the sale or disposal of depreciable personal property, which may be recaptured as ordinary income.

Ordinary Income

Income earned from providing services, including wages, salaries, commissions, and income from businesses in which there is material participation.

Depreciation

A tax deduction reflecting the decrease in value of an asset over time due to wear and tear.

Section 1245

A tax code provision defining the treatment of gains from the sale of depreciable personal property, requiring that such gains be treated as ordinary income to the extent of depreciation taken.