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are expected to persist into the future. The gain on the sale of shortterm investments is expected to occur
infrequently, as a secondary activity to the primary business operations. The losses due to the
discontinued operations loss and its sale are onetime amounts, not expected to persist into the future.
The extraordinary gain on appropriated land is both unusual and infrequent and is not expected to occur
again. Finally, the cumulative effect of a change in accounting principle may occur, but only infrequently.
Future income statements should not be affected by many accounting changes. P13–5
1. 2. 3. Hurricanes are unusual in that they are not part of a company's normal operations; however, they
occur relatively frequently in Florida. Thus, this loss probably should not be classified as an
extraordinary item. Instead, it should be disclosed gross of taxes as part of other revenues and
A loss on the disposal of a business segment is not considered an extraordinary item. This item
should be disclosed net of taxes as a separate item on the income statement after income from
continuing operations, but before extraordinary items. The classification of this item is the
disposal of a business segment. This loss appears to be both unusual and infrequent; consequently, it should be classified as an
extraordinary item on the income statement. Extraordinary items should be disclosed net of any tax effect.
4. Writing off an open account receivable as uncollectible should not be disclosed on the income
statement. Under GAAP, a company should use the allowance method to account for bad debts.
With the allowance method, writeoffs of uncollectible accounts affect only balance sheet
accounts. 5. Floods are unusual in that they are not part of a company's normal operations. Although Arizona
does get flooding, particularly flash floods, the flooding would probably be considered to be
infrequent. Consequently, this loss should be classified as an extraordinary item on the income
statement. Extraordinary items should be disclosed net of any tax effect. b. Extraordinary items:
Loss to employee destruction (net of tax benefit of $78,750)
Loss due to flood (net of tax benefit of $31,500)
Total Loss on Extraordinary Items $204,750 146,250
a. b. Income from continuing operations (before taxes)
Income from continuing operations
Extraordinary loss (net of tax benefit of $47,250)
Income tax expense =
= P13–6 $
464,750 Income taxes on net income generated during 2012
Income taxes on income from continuing operations + Income
tax effect of extraordinary loss
$297,500 tax expense [from part (a)] – $47,250 tax benefit
[from part (a)]
$250,250 Concluded c.
Statement of Retained Earnings
For the Year Ended December 31, 2012
Retained earnings, January 1, 2012
Plus: Net income
Less: Dividends declared during 2012
Retained earnings, December 31, 2012
d. $ $ 1,259,000
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.
- Fall '08