Extraordinary items are gains and losses that are

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Extraordinary items are gains and losses that are material, and result from eventsthat are both unusual andinfrequent. These criteria must be considered in light of theenvironment in which the entity operates. There obviously is a considerable degree ofsubjectivity involved in the determination. The concepts of unusual and infrequentrequire judgment. In making these judgments, an accountant should keep in mind theoverall objective of the income statement. The key question is how the event relates toa firm’s future profitability. If it is judged that the event, because of its unusual natureand infrequency of occurrence, is not likely to occur again, separate reporting as anextraordinary item is warranted.Ethical Dilemma:It appears from the facts of the case that it would be difficult for the company tocome to the conclusion that a material product recall is not likely to occur again in theforeseeable future. This type of event has occurred before and is common in theindustry. While a subjective judgment, extraordinary treatment of the $10 milliondoes not appear warranted. Is the obligation of Jim and the CEO to maximize incomefrom continuing operations, the company's position on the stock market andmanagement bonuses stronger than their obligation to fairly present accountinginformation to the users of financial statements? Who is affected?Jim DietzCEO and other managersOther employeesShareholdersPotential shareholders from the stock marketCreditorsCompany auditors4-75
Chapter 04 - The Income Statement and Statement of Cash FlowsResearch Case 4-8Requirement 1The accounting standards topic number that addresses exit or disposal costobligations is FASB ASC 420: “Exit or Disposal Cost Obligations.”Requirement 2The specific citation that addresses the initial measurement of these obligations isFASB ASC 420–10–30–1: “Exit or Disposal Cost Obligations–Overall–InitialMeasurement.”Requirement 3A liability for a cost associated with an exit or disposal activity is measuredinitially at its fair value in the period in which the liability is incurred.Requirement 4The specific citation that describes the disclosure requirements for exit or disposalobligations is FASB ASC 420–10–50–1: “Exit or Disposal Cost Obligations–Overall–Disclosure.”4-76
Chapter 04 - The Income Statement and Statement of Cash FlowsCase 4-8 (concluded)Requirement 5All of the following information is disclosed in notes to financial statements that include the period in which an exit or disposal activity is initiated and any subsequent period until the activity is completed: a.A description of the exit or disposal activity, including the facts and circumstances leading to the expected activity and the expected completion dateb.For each major type of cost associated with the activity (for example, one-time employee termination benefits, contract termination costs, and other associated costs), both of the following is disclosed: 1.The total amount expected to be incurred in connection with the activity,

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