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Unformatted text preview: ns probably would not be considered to be
extraordinary. c. The entire loss would have been $69.231 million. That is, the aftertax loss of $36 million divided by (1 –
tax rate of 48%). The journal entries would be: Extraordinary Loss from Volcano Eruption (Lo, –SE) 69,231,000
Timberland (–A) 69,231,000 Recognized extraordinary loss from volcano eruption.
Income Tax Liability (–L)
Extraordinary Loss from Volcano Eruption (–Lo, +SE)
Recognized tax benefit from volcano eruption. 33,231,000
a. Standard & Poor's may have viewed the charge as different from previous years and felt including it would
distort comparisons from year to year. Value Line may have felt that the exclusion of the charge would be
a distortion of the income for the year. b. The income statement is comprised of several categories. Revenues and expenses that are both usual
and frequent are classified as operations. Revenues and expenses that are either usual or frequent, but not
both, are classified as other revenues and expenses and considered part of continuing operations.
Following continuing operations are special items. Such items, in order of their disclosure, are
discontinued operations, extraordinary items (which are both unusual and infrequent), and the cumulative
effect of accounting changes. All items listed after continuing operations are disclosed net of the
associated tax effect. c. All items listed on a company's income statement are important in that these items affect a company's
actual financial position and/or the amounts reported on the balance sheet for assets and liabilities. Thus,
financial analysts do not care how or where the information is recorded as long as the information is
Alternatively, the location of items on the income statement can have important economic consequences.
For example, if a company's management receives incentive compensation based on income, it is
important whether the incentive compensation contract defines income as income from operations, income
from continuing operations, or net income. Whether something is classified as an operating expense, an
other expense, or an extraordinary loss, therefore, would affect management's incentive compensation,
depending on how income is defined. In addition, stockholders are interested in a company's earning
power, i.e., the company's ability to generate net assets on an ongoing basis. If the company were to
include items as part of income from continuing operations that were not expected to continue on into the
future, stockholders would be receiving distorted information that could cause them to misvalue the
company's stock. Thus, the classification of items on the income statement could affect the magnitude of
management's incentive compensation as well as the valuation of the entire company. ID13–5
a. b. Analysts are many times looking for companies that will be the dominant company in different
business categories. The internet has provided an alternative method for selling goods and services to
the public. Since this is a new industry many analysts were not sure how much market share this
channel would take away from the tra...
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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