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CHAPTER 14 INCOME TAXES, UNUSUAL INCOME ITEMS, AND INVESTMENTS IN STOCKS CLASS DISCUSSION QUESTIONS 1. a. Current liability b. Long-term liability or deferred credit (fol- lowing the Long-Term Liabilities section) 2. This is an example of a fixed asset impair- ment. Thus, a loss of $130 million should be disclosed on the income statement as a separate line item above the income from continuing operations, and the plant and equipment should be written down to their appraised value ($20 million). 3. The severance costs are a current period expense associated with downsizing opera- tions. Thus, a restructuring charge should be recognized on the income statement (above income from continuing operations) and any liability recognized. As payments are made to employees, the liability is de- creased. 4. Extraordinary items: Gain on condemnation of land, net of ap- plicable income tax of $60,000. ...... $90,000 5. The urban renewal agency’s acquisition of the property may be viewed as a form of expropriation under paragraph 23 of Ac- counting Principles Board Opinion No. 30, Reporting the Results of Operations Re- porting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Paragraph 23 says a gain or loss from sale or abandonment of property, plant, or equipment used in the business should be included as an extraordinary item if it is the direct result of an expropri- ation. Accordingly, the gain should be re- ported as an extraordinary item in the in- come statement. 6. The “loss from discontinued operations” of $2.3 billion should be identified on the in- come statement as discontinued opera- tions and should follow the presentation of the results of continuing operations (sales less the customary costs and expenses). The data on discontinued operations (iden- tity of the segment, date of disposal, etc.) should be disclosed in a note. 7. Readers of the financial statements should be able to assume that the successive fin- ancial statements of a business are based consistently on the same generally accep- ted accounting principles. Therefore, signi- ficant changes in accounting methods must be disclosed so that the reader is alerted to the effect of those changes on the financial statements. 8. a. Yes, the $0.45-per-share gain should be reported as an extraordinary item. b. Operations appear to have declined. The earnings per share for the current year that is comparable to the preced- ing year’s earnings per share of $1.10 is $0.93 ($1.38 – $0.45). 9. a. Examples of other comprehensive in- come items include foreign currency items, pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities.
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This note was uploaded on 01/15/2012 for the course ACC 305 taught by Professor Williams during the Spring '11 term at University of Phoenix.

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