Slide
4-1
Separately Reported Items
Slide
4-2
Separately Reported Items
Three types of events are reported separately,
net of taxes:
Income from continuing operations
1. Discontinued operations (net of tax
effect)
2. Extraordinary items (net of tax effect)
3. Cumulative effect of a change in
accounting principle (net of tax effect)
Net Income
$ xxx
xx
xx
xx
$ xxx
Slide
4-3
Intraperiod Income Tax Allocation
Income Tax Expense must be associated with
each component of income that causes it.
Show Income Tax
Expense related to
Income from
Continuing
Operations.
Report effects of Discontinued
Operations, Extraordinary
Items, and Cumulative Effect of
Accounting Changes NET OF
INCOME TAXES.
Slide
4-4
Discontinued Operations
•
•
Sale or disposal of a
component of an entity.
A component includes:
•
•
•
•
•
Reportable segments
Operating segments
Reporting units
Subsidiaries
Asset groups
Slide
4-5
Discontinued Operations
Report results of operations separately if
two conditions are met:
 The operations and cash flows of
the component have been (or will
be) eliminated from the ongoing
operations.
 The entity will not have any
significant continuing involvement
in the operations of the
component after the disposal
transaction.
Slide
4-6
Discontinued Operations
Results of operations include
two items:
1. The income or loss stream for
the period from the
identifiable discontinued
operation.
2. The actual gain or loss from
disposal of the component
or
an “impairment loss” if the
component is held for resale.
Slide
4-7
Discontinued Operations
•
Results of operations include
two items:
1. The income or loss stream for the
period from the identifiable
discontinued operation.
2. The actual gain or loss from
Carrying Value
of Assets > (Fair Value of Assets - Cost to Sell)
disposal of the component
or
an “impairment loss” if the
component is held for resale.
Slide
4-8
Discontinued Operations Example
During the year, Apex Co. sold an
unprofitable component of the company. The
component had a net loss from operations
during the period of $150,000 and its assets
sold at a loss of $100,000. Apex reported
income from continuing operations of
$120,000. All items are taxed at 30%.
How will this appear on the income
statement?
Slide
4-9
Discontinued Operations Example
Computation of Loss from Discontinued Operations
(Net of Tax Effect):
Loss from discontinued operations
Less: Tax benefit ($150,000 × 30%)
Net loss
$
Loss on disposal of assets
Less: Tax benefit ($100,000 × 30%)
Net loss
$
$
$
(150,000)
45,000
(105,000)
(100,000)
30,000
(70,000)
Slide
4-10
Discontinued Operations Example
Income Statement Presentation:
Income from continuing operations
Discontinued operations:
Loss on operations (net of
tax benefit of $45,000)
Loss on disposal of assets (net
of tax benefit of $30,000)
Net loss
$ 120,000
(105,000)
(70,000)
$ (55,000)
Slide
4-11
Another Example: Kandon Enterprises
E4-8 (p. 206)
Slide
4-12
Extraordinary Items
• Material in amount
• Gains or losses that are
unusual in nature and
infrequent in occurrence.
required by GAAP.
• Reported net of related
taxes
Slide
4-13
Extraordinary Items
Example
During the year, Apex Co. experienced a
loss of $75,000 due to an earthquake at one
of its manufacturing plants in Nashville.
This was considered an extraordinary item.
The company reported income before
extraordinary item of $120,000. All gains
and losses are subject to a 30% tax rate.
How would this item appear on the
income statement?
Slide
4-14
Extraordinary Items
Example
Extraordinary Loss
Less: Tax Benefits
($75,000 × 30%)
Net Loss
$ (75,000)
22,500
$ (52,500)
Income Statement Presentation:
Income before extraordinary item
Extraordinary Loss:
Earthquake loss
(net of tax benefit of $22,500)
Net income
$ 120,000
(52,500)
$ 67,500
Slide
4-15
Unusual or Infrequent Items
Items that are material and are either
unusual or infrequent—but not both—
are included as a separate item in
continuing operations.
Slide
4-16
Application Case 4-8 (page 214)
Slide
4-17
Accounting Changes
Type of Accounting
Change
Change in Accounting
Principle
Change in Accounting
Estimate
Change in Reporting
Entity
Definition
Replaces one GAAP with
another
Revision of an estimate
because of new
information or new
experience
Change from reporting as
one type of entity to
another type of entity
Slide
4-18
Change in Accounting Principle
• Occurs when
– Changing from one GAAP method to
another GAAP method, or
– Changing the method of application of
an existing principle.
• Make a catch-up adjustment known
as the cumulative effect of a change
in accounting principle.
• The cumulative effect is reported
net of taxes and after extraordinary
items.
Slide
4-19
Change in Accounting Principle
Example
During the year, Apex Co. decided to change
from the double-declining balance to the
straight-line method for depreciation. The
effect of this change is an increase in net
income of $65,000. Apex reported income of
$120,000 during the year. All items of
income are subject to a 30% tax rate.
How would this item appear on the
income statement?
Slide
4-20
Change in Accounting Principle
Example
Computation:
Increase in income
$
Less: Tax expense ($65,000 × 30%)
Net increase in income
$
Income from operations
Cumulative effect of change
in accounting principle:
(net of $19,500 tax expense)
Net income
65,000
(19,500)
45,500
$ 120,000
45,500
$ 165,500
Slide
4-21
Change in Estimates
• Revision of a previous
accounting estimate.
• The new estimate should be
used in the current and
future periods.
• The prior accounting results
should not be be restated.
Slide
4-22
Change in Estimates
Example
On January 1, 2000, we purchased
equipment costing $30,000, with a useful
life of 10 years and no salvage value.
During 2003, we determine that the
remaining useful is 5 years (8-year total
life). We use straight-line depreciation.
Compute the revised depreciation
expense for 2003.
Slide
4-23
Change in Estimates
Example
Asset cost
Accumulated depreciation
12/31/02 - ($3,000 × 3 years)
Remaining to be depreciated
Remaining useful life
Revised annual depreciation
$
30,000
$
(9,000)
21,000
÷ 5 years
4,200
Record depreciation expense of $4,200 for
2003 and subsequent years.
Slide
4-24
Change in Reporting Entity
Financial
statements
are prepared
for separate
entities.
Slide
4-25
Change in Reporting Entity
If two entities
combine, a single
set of consolidated
financial statements
is generally
required.
Slide
4-26
Change in Reporting Entity
If two entities combine:
1. Prepare a single set of
consolidated financial
statements.
2. Retroactively restate
financial statements of
prior periods.
Slide
4-27
Prior Period Adjustments
• Corrections of errors from a
previous period.
• Appear on the Statement
of Retained Earnings as
an adjustment to beginning
retained earnings.
• Must show the adjustment
net of income taxes.
Slide
4-28
Prior Period Adjustments Example
While reviewing the depreciation entries
for 2001-2004, the controller found that
in 2003 depreciation expense was
incorrectly debited for $150,000 when in
fact it should have been debited
$125,000. All items are taxed at 30%.
Prepare the necessary journal entry in
2004 to correct this prior period error.
Slide
4-29
Prior Period Adjustments Example
GENERAL JOURNAL
Date
Description
PR
12/31/03 Depreciation Expense
Debit
Page: 180
Credit
150,000
Accumulated Depreciation
If this was the original
entry, how do we correct it?
Can we just reverse it?
Why or why not?
150,000
Slide
4-30
Prior Period Adjustments Example
GENERAL JOURNAL
Date
Description
PR
Debit
Page: 180
Credit
2004 Entry
2004
Accumulated Depreciation
25,000
To correct the 2003 error in 2004, we can
debit Accumulated Depreciation since it is a
permanent account.
Slide
4-31
Prior Period Adjustments Example
GENERAL JOURNAL
Date
Description
PR
Debit
Page: 180
Credit
2004 Entry
2004
Accumulated Depreciation
25,000
Retained Earnings
We can’t credit Depreciation Expense
since it was closed in 2003, so we credit
Retained Earnings.
17,500
Slide
4-32
Prior Period Adjustments Example
GENERAL JOURNAL
Date
Description
PR
Debit
Page: 180
Credit
2004 Entry
2004
Accumulated Depreciation
25,000
Income Taxes Payable
Retained Earnings
Remember to consider the tax effects:
$25,000 × 30% = $7,500 taxes payable
7,500
17,500
Slide
4-33
Application Problem 21-14
SST Page 1071
Slide
4-34
Next Time ….
Coach’s Cash Flows