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Problem 4-2 (Part Level Submission)
On November 1, 2016, 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 $285 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 $80 million on November 1, 2016.
Campbell’s management has entered into negotiations for a cash sale of the division for $68 million (net of costs to sell). The sale date and final disposal date of the division is expected to be July 1, 2017. Campbell Corporation has a fiscal year ending May 31. The results of operations for the Rocketeer Division for the 2016-17 fiscal year and the estimated results for June 2017 are presented below. The before-tax losses after October 31, 2016, are calculated without depreciation on the building and equipment.
PeriodBefore-Tax LossJune 1, 2016, to October 31, 2016$(4,750,000)November 1, 2016, to May 31, 2017(3,040,000)June 1 to 30, 2017 (estimated)(570,000)
The Rocketeer Division will be accounted for as a discontinued operation on Campbell’s financial statements for the year ended May 31, 2017. Campbell’s tax rate is 25% on operating income and all gains and losses. Campbell prepares financial statements in accordance with IFRS.
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