510chapter4fall2009afterclass9242009

510chapter4fall2009afterclass9242009 - Reporting Irregular...

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Reporting Irregular Items Illustration Illustration Number of Irregular Items Reported in a Recent Year by 600 Large Companies Companies are required to report irregular items in the financial Companies are required to report irregular items in the financial statements so users can determine the long-run earning power statements so users can determine the long-run earning power of the company. of the company.
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Irregular items fall into six categories Discontinued operations. Extraordinary items. Unusual gains and losses. Changes in accounting principle. Changes in estimates. Corrections of errors. Reporting Irregular Items
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Discontinued Operations occurs when, (a) company eliminates the results of operations and cash flows of a component . (a) there is no significant continuing involvement in that component. Amount reported “net of tax.” Reporting Irregular Items
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Examples of Discontinued Operations A sale by a diversified company of a major division which represents the company’s only activities in the electronics industry. The assets and results of operations of the division are clearly segregated for internal financial reporting purposes from the other assets and results of operations of the company.
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Examples of Discontinued Operations (cont’d) A sale by a meat packing company of a 25% interest in a professional football team. All other activities of the company are in the meat packing business
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Disposals that do not qualify A manufacturer of children’s wear discontinues all of its operations in Italy which were composed of designing and selling children’s wear for the Italian market.
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Disposals that do not qualify A diversified company sells a subsidiary which manufactures furniture. The company has retained its other furniture manufacturing subsidiary (disposal of a line of business).
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Exercise: McCarthy Corporation had after tax income from continuing operations of $55,000,000 in 2007. During 2007, it disposed of its restaurant division at a pretax loss of $270,000. Prior to disposal, the division operated at a pretax loss of $450,000 in 2007. Assume a tax rate of 30%. Prepare a partial income statement for McCarthy. Reporting Discontinued Operations Income from continuing operations $55,000,000 Discontinued operations: Loss from operations, net of $135,000 tax 315,000 Loss on disposal, net of $81,000 tax 189,000 Net income $54,496,000 Total loss on discontinued operations 504,000
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Reporting Discontinued Operations Other revenue (expense): I nterest revenue 17,000 I nterest expense (21,000) Total other (4,000) I ncome bef ore taxes 79,000 I ncome tax expense 24,000 I ncome f rom continuing operations 55,000 Discontinued operations: Loss f rom operations, net of tax 315 Loss on disposal, net of tax 189 Total loss on discontinued operations 504 Net income 54,496 $ I ncome Statement (in t housands) Sales 285,000 $ Cost of goods sold 149,000
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This note was uploaded on 12/29/2009 for the course ACC 5100 taught by Professor Andrews during the Fall '09 term at Wayne State University.

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510chapter4fall2009afterclass9242009 - Reporting Irregular...

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