Although arizona does get flooding particularly flash

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Unformatted text preview: trative) 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 a. 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 expenses. 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 58,500 P13–6 a. b. Income from continuing operations (before taxes) Income taxes Income from continuing operations Extraordinary loss (net of tax benefit of $47,250) Net income Income tax expense = = = = P13–6 $ $ $ 850,000 297,500 552,500 (87,750) 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. MTM Company 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. $ $ 1,259,000 464,750...
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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.

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