Provision for restructuring is shown grosson the

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Unformatted text preview: ssociated liability. The appropriate course of action depended upon (1) whether it was remote, reasonably possible, or probable, given the information available in 1989, that Kodak would eventually lose the lawsuit and (2) whether the amount of the loss could be reasonably estimated in 1989. If the probability that Kodak would eventually lose the lawsuit was remote, then Kodak could ignore the lawsuit for financial reporting purposes. If the probability of the loss was reasonably possibly or if the amount of the loss could not be reasonably estimated, Kodak should have disclosed the lawsuit in a footnote only. Finally, if both the probability of the loss was probable and the amount of the loss could be reasonably estimated, Kodak should have recorded a loss and associated liability. Due to the magnitude of the case and the associated publicity, it is doubtful that Kodak ignored the lawsuit for financial reporting purposes. In addition, if Kodak knew that it was probable that it would lose the lawsuit, it probably would have settled the case out of court. Thus, Kodak most likely did not think it was probable that it would lose the lawsuit, and therefore only disclosed the lawsuit in a footnote. c. There are at least two reasons why Kodak's stock increased in value. First, the settlement provided unexpected "good" news about Kodak. The stock market may have expected Kodak to lose the lawsuit and have to pay out close to the amount being asked for by Polaroid. The fact that Kodak had to pay considerably less than expected caused the stock market to positively reevaluate the prospects of investing in Kodak. Second, Kodak reported a large increase in operating earnings. Stockholders are interested in a company's earning power. That is, stockholders are interested in a company's ability to generate net assets from operations on an ongoing basis. The large increase in Kodak's operating earnings provided information to the stock market that Kodak has strong earning power. Alternatively, the lawsuit settlement is a one­time payout that should not adversely affect Kodak's ongoing operations, although it may have some short­term effects on Kodak's earning power. ID13–7 a. Net earnings from discontinued operations – is shown net of tax as an irregular item on the income statement. Research and development costs – are shown as an expense below cost of goods sold and before income from continuing operations. Foreign currency translation – recognized gains and losses are shown gross on the income statement as an other gain or loss. Any unrecognized gains or losses are included in comprehensive income. Net gain on disposal of business – is shown net of tax below income from continuing operations on the income statement. Provision for restructuring – is shown gross on the income statement in the other gain or loss section. Gain on the sale of assets – are shown gross in the other gain or loss section of the income statement. Cost of products sold – is shown gross in the cost of goods section of the income statement. Litigati...
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