Auto World Inc. (AWI) is a leading automotive retail and service chain. They have many operating segments comprised of two different centers 10 miles apart from each other. Pit Stop Centers (PSC) offer service labor, installed merchandise, and tires while their Auto Boyz Centers (ABC) sells automotive merchandise. AWI has a plan to close their operating segment PSC to change their current operating structure to improve and efficiently deliver retail products and automotive services by providing their customers with a ‘one stop’ shopping for ‘do-it-yourself’ retail customers and ‘do-it-for-me’ customers” (PSC Case). AWI expects this change to enhance their ability to increase market share, improve sales, and company earnings. This change in restructuring will have an effect on current earnings and will need to be reported properly in their 2007 Income Statement. AWI must report this continuing activity properly under US Generally Accepted Accounting Principles (GAAP).
The FASB Accounting Standards Codification (ASC), commonly known as GAAP has specific standards that must be followed in order to classify the disposal of an entity as discontinued or continues operation of a component of an entity. Under the guidance of numerous ASC’s, AWI does not meet the two conditions to report their PSC closures as discontinued operations. The criteria used, assessment period, presentation, and disclosure for this retail company will be explained in detail when applying proper GAAP.
A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity; it may be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group in which Auto World determined correctly under the first requirement that the PSC met the definition of a “component of an entity” (ASC 205-20-20). The two conditions for reporting the disposed transaction...
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