KIESO

INTERMEDIATE
ACCOUNTING 15E UPDATE
EXTRAORDINARY ITEMS: INCOME STATEMENT PRESENTATION
This section provides an introduction to the new guidance related to the elimination of separate
reporting of extraordinary items and the presentation of unusual gains and losses. Updated text
material related to this topic in Chapter 4 of Intermediate Accounting is provided, along with updated
Brief Exercises, Exercises, Problems, and Concepts for Analysis.

Overview of Extraordinary Items

In January 2015, the FASB simplified income statement presentation requirements by eliminating the concept
of extraordinary items [Accounting Standards Update 2015-01Income StatementExtraordinary and
Unusual Items (Subtopic 225-20)Simplifying Income Statement Presentation by Eliminating the Concept of
Extraordinary Items]. For an item to be classified as extraordinary, it must be both unusual in nature and
infrequent in occurrence. Companies have difficulty applying the concept of extraordinary because it is often
unclear when a transaction should be considered both unusual in nature and infrequent in occurrence. As a
result, the concept of extraordinary items has been interpreted narrowly in practice so companies rarely, if
ever, report a transaction as extraordinary.
In addition, while users find information about unusual or infrequent transactions helpful, they do not
find the extraordinary item classification and presentation necessary to identify these transactions. The FASB
concluded that this new standard will not result in a loss of information because the presentation and
disclosure guidance for items that are unusual in nature or that occur infrequently will be retained and will be
expanded to include items that are both unusual in nature and infrequently occurring. These changes are part
of the FASBs simplification efforts and also contribute to international convergence, as IFRS does not include
the concept of extraordinary items.
Instructors should substitute the following material for the Unusual Gains and Losses section in
Chapter 4 (pages 169-170) in the textbook and then omit the Extraordinary Items section (pages 173-177).
Replacement end-of-chapter material is provided for BE4-5, E4-6, E4-9, E4-11, E4-17, P4-1, P4-3, P4-5, P4-
7, CA4-4, CA4-5, and CA4-7.
Unusual Gains and Losses
The following items may need separate disclosure in the income statement to help users predict the amounts,
timing, and uncertainty of future cash flows.

Losses on the write-down or write-off of receivables; inventories; property, plant, and equipment;
deferred research and development costs; or other intangible assets.
Gains or losses from exchange or translation of foreign currencies, including those relating to
major devaluations and revaluations.
Restructuring charges.
Other gains or losses from sale or abandonment of property, plant, or equipment used in the
business.
Effects of a strike, including those against competitors and major suppliers.
Adjustment of accruals on long-term contracts.
Losses due to a major casualty (such as an earthquake or flood), an expropriation, or a prohibition
under a newly enacted law or regulation.

Items that are unusual in nature, infrequent in occurrence, or both should be presented within income from
continuing operations. These items should not be reported net of tax. The income tax expense or benefit
related to such items should be included in the total income tax or benefit reported on the income statement.
For example, PepsiCo, Inc. presented an unusual charge in its income statement, as Illustration 4-7 shows.
ILLUSTRATION 4-7
Income Statement Presentation of Unusual Charges

Restructuring charges, like the one PepsiCo reported in Note 2 above, are common (see also Illustration 4-6).
A restructuring charge relates to a major reorganization of company affairs, such as costs associated with
employee layoffs, plant closing costs, write-offs of assets, and so on.
The FASB takes the position that revenues and expenses, other revenues and gains, and other
expenses and losses should be reported as part of income before income taxes. Therefore, as indicated
earlier, none of these items should be shown net of tax. For unusual gains and losses, companies may show
each gain or loss as a separate item on the income statement before Income from operations before income
taxes. Others will use captions, such as Other revenues and gains or Other expenses and losses, and then
itemize them in these sections or in the notes to the financial statements. For homework purposes, itemize
gains and losses, revenues, and expenses that are not reported as part of the revenue and expense sections
of the income statement in the Other revenues and gains section or Other expenses and losses section.
 REPLACEMENT BRIEF EXERCISES

BE4-5 Stacy Corporation had income from operations of $7,200,000. In addition, it suffered an unusual and infrequent
pretax loss of $770,000 from a volcano eruption, interest revenue of $17,000, and a write-down on buildings of $53,000.
The corporations tax rate is 30%. Prepare a partial income statement for Stacy beginning with Income from operations.
The corporation had 5,000,000 shares of common stock outstanding during 2014.

REPLACEMENT EXERCISES

E4-6 (Multiple-Step and Irregular Items) The following balances were taken from the books of Maria Conchita Alonzo Corp.
on December 31, 2014.

Interest revenue $ 86,000 Accumulated depreciationequipment $ 40,000

Cash 51,000 Accumulated depreciationbuildings 28,000
Sales revenue 1,380,000 Notes receivable 155,000
Accounts receivable 150,000 Selling expenses 194,000
Prepaid insurance 20,000 Accounts payable 170,000
Sales returns and allowances 150,000 Bonds payable 100,000
Allowance for doubtful accounts 7,000 Administrative and general expenses 97,000
Sales discounts 45,000 Accrued liabilities 32,000
Land 100,000 Interest expense 60,000
Equipment 200,000 Notes payable 100,000
Buildings 140,000 Loss from earthquake damage 150,000
Cost of goods sold 621,000 Common stock 500,000
Retained earnings 21,000

Assume the total effective tax rate on all items is 34%.

Instructions
Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year.

E4-9 (Multiple-Step Statement with Retained Earnings) Presented below is information related to Ivan Calderon
Corp. for the year 2014.

Net sales $1,300,000 Write-off of inventory due to obsolescence $ 80,000

Cost of goods sold 780,000 Depreciation expense omitted by accident in 2013 55,000
Selling expenses 65,000 Casualty loss 50,000
Administrative expenses 48,000 Cash dividends declared 45,000
Dividend revenue 20,000 Retained earnings at December 31, 2013 980,000
Interest revenue 7,000 Effective tax rate of 34% on all items

Instructions
(a) Prepare a multiple-step income statement for 2014. Assume that 60,000 shares of common stock are
outstanding.
(b) Prepare a separate retained earnings statement for 2014.
E4-11 (Condensed Income StatementPeriodic Inventory Method) The following are selected ledger accounts of
Spock Corporation at December 31, 2014.

Cash $ 185,000 Salaries and wages expense (sales) $284,000

Inventory 535,000 Salaries and wages expense (office) 346,000
Sales revenue 4,275,000 Purchase returns 15,000
Unearned sales revenue 117,000 Sales returns and allowances 79,000
Purchases 2,786,000 Freight-in 72,000
Sales discounts 34,000 Accounts receivable 142,500
Purchase discounts 27,000 Sales commissions 83,000
Selling expenses 69,000 Telephone and Internet expense (sales) 17,000
Accounting and legal services 33,000 Utilities expense (office) 32,000
Insurance expense (office) 24,000 Miscellaneous office expenses 8,000
Advertising expense 54,000 Rent revenue 240,000
Delivery expense 93,000 Casualty loss 70,000
Depreciation expense (office equipment) 48,000 Interest expense 176,000
Depreciation expense (sales equipment) 36,000 Common stock ($10 par) 900,000

Spocks effective tax rate on all items is 34%. A physical inventory indicates that the ending inventory is $686,000.
Instructions
Prepare a condensed 2014 income statement for Spock Corporation.

E4-17 (Various Reporting Formats) The following information was taken from the records of Roland Carlson Inc.
for the year 2014: income tax applicable to income from continuing operations $187,000, income tax applicable to
loss on discontinued operations $25,500, and unrealized holding gain on available-for-sale securities $15,000.

Gain on sale of equipment $ 95,000 Cash dividends declared $ 150,000

Loss on discontinued operations 75,000 Retained earnings January 1, 2014 600,000
Administrative expenses 240,000 Cost of goods sold 850,000
Rent revenue 40,000 Selling expenses 300,000
Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2014 were 100,000.

Instructions
(a) Prepare a single-step income statement.
(b) Prepare a comprehensive income statement for 2014, using the two statement format.
(c) Prepare a retained earnings statement for 2014.
 REPLACEMENT PROBLEMS

P4-1 (Multiple-Step Income, Retained Earnings) The following information is related to Dickinson Company for
2014.

Retained earnings balance, January 1, 2014 $ 980,000

Sales revenue 25,000,000
Cost of goods sold 16,000,000
Interest revenue 70,000
Selling and administrative expenses 4,700,000
Write-off of goodwill 820,000
Income taxes for 2014 1,244,000
Gain on the sale of investments 110,000
Loss due to flood damage 390,000
Loss on the disposition of the wholesale division (net of tax) 440,000
Loss on operations of the wholesale division (net of tax) 90,000
Dividends declared on common stock 250,000
Dividends declared on preferred stock 80,000

Dickinson Company decided to discontinue its entire wholesale operations and to retain its manufacturing operations. On
September 15, Dickinson sold the wholesale operations to Rogers Company. During 2014, there were 500,000 shares
of common stock outstanding all year.
Instructions
Prepare a multiple-step income statement and a retained earnings statement.

P4-3 (Irregular Items) Maher Inc. reported income from continuing operations before taxes during 2014 of $790,000.
Additional transactions occurring in 2014 but not considered in the $790,000 are as follows.
1. The corporation experienced an uninsured flood loss in the amount of $90,000 during the year.
2. At the beginning of 2012, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had
a useful life of 6 years. The bookkeeper used straight-line depreciation for 2012, 2013, and 2014, but failed to
deduct the salvage value in computing the depreciation base.
3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax).
4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender
value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is
nontaxable).
5. The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this
transaction meets the criteria for discontinued operations.
6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method.
The effect of this change on prior years is to increase 2012 income by $60,000 and decrease 2013 income by
$20,000 before taxes. The FIFO method has been used for 2014. The tax rate on these items is 40%.
Instructions
Prepare an income statement for the year 2014 starting with income from continuing operations before taxes. Compute
earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are
120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)
P4-5 (Irregular Items) Presented below is a combined single-step income and retained earnings statement for Nerwin
Company for 2014 (amounts in thousands).

Net sales revenue $640,000

Costs and expenses
$500,000
Cost of goods sold
Selling, general, and administrative expenses 66,000
Other 17,000 583,000
Income before income tax 57,000
Income tax 19,400
Net income 37,600
Retained earnings at beginning of period, as previously
reported 141,000

Adjustment required for correction of error (7,000)

Retained earnings at beginning of period, as restated 134,000
Dividends on common stock (12,200)
Retained earnings at end of period $159,400

Additional facts are as follows.

1. Selling, general, and administrative expenses for 2014 included a charge of $8,500,000 that was usual
but infrequently occurring.
2. Other for 2014 included a los s on s a l e of eq u i p m ent of $6,000,000.
3. Adjustment required for correction of an error was a result of a change in estimate (useful life of certain
assets reduced to 8 years and a catch-up adjustment made).
4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial
statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and
retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation
and discuss its theoretical rationale. (Do not prepare a revised statement.)

P4-7 (Income Statement, Irregular Items) Wade Corp. has 150,000 shares of common stock outstanding. In 2014,
the company reports income from continuing operations before income tax of $1,210,000. Additional transactions not
considered in the $1,210,000 are as follows.
1. In 2014, Wade Corp. sold equipment for $40,000. The machine had originally cost $80,000 and had
accumulated depreciation of $30,000. The gain or loss is considered ordinary.
2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $190,000
before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from
operations of the discontinued subsidiary was $90,000 before taxes; the loss from disposal of the
subsidiary was $100,000 before taxes.
3. An internal audit discovered that amortization of intangible assets was understated by $35,000 (net of tax) in
a prior period. The amount was charged against retained earnings.
4. The company had a gain of $125,000 on the condemnation of much of its property. The transaction is
determined to be unusual and infrequent .
Instructions
Analyze the above information and prepare an income statement for the year 2014, starting with income from continuing
operations before income tax. Compute earnings per share as it should be shown on the face of the income statement.
(Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)
 REPLACEMENT CONCEPTS FOR ANALYSIS

CA4-4 (Income Reporting Items) Simpson Corp. is an entertainment firm that derives approximately 30% of its income
from the Casino Knights Division, which manages gambling facilities. As auditor for Simpson Corp., you have recently
overheard the following discussion between the controller and financial vice president.

Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the
income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should
simply report the gain on the sale as other income or expense without detail.

Controller: Professional pronouncements would require that we report this information separately in the income
statement. If a sale of this type is considered a discontinued operation, it must be reported as such and separate from
income from continuing operations.

Vice President: What about the walkout we had last month when employees were upset about their commission income?
Would this situation not also be subject to special reporting outside of operating income?

Controller: I am not sure whether this item should get special reporting or not.

Vice President: Oh well, it doesnt make any difference because the net effect of all these items is immaterial, so no
disclosure is necessary.
Instructions
On the basis of the foregoing discussion, answer the following questions.
(a) Who is correct about handling the sale? What would be the correct income statement presentation for the
sale of the Casino Knights Division?
(b) How should the walkout by the employees be reported?
(c) What do you think about the vice presidents observation on materiality?
(d) What are the earnings per share implications of these topics?
CA4-5 (Identification of Income Statement Weaknesses) The following financial statement was prepared by
employees of Walters Corporation.

WALTERS CORPORATION
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 2014
Revenues
Gross sales, including sales taxes $1,044,300
Less: Returns, allowances, and cash discounts 56,200
Net sales 988,100
Dividends, interest, and purchase discounts 30,250
Recoveries of accounts written-off in prior years 13,850
Total revenues 1,032,200
Costs and expenses
Cost of goods sold, including sales taxes 465,900
Salaries and related payroll expenses 60,500
Rent 19,100
Delivery expense and freight-in 3,400
Bad debt expense 27,800
Total costs and expenses 576,700
Operating income 455,500
Other items
Loss on liquidation of inventory (Note 1) 71,500
Loss on sale of marketable securities (Note 2) 39,050
Loss on sale of warehouse (Note 3) 86,350

Total other items 196,900

Net income $ 258,600
Net income per share of common stock $2.30

Note 1: New styles and rapidly changing consumer preferences resulted in a $71,500 loss on the
disposal of discontinued styles and related accessories.
Note 2: The corporation sold an investment in marketable securities at a loss of $39,050. The
corporation normally sells securities of this nature.
Note 3: The corporation sold one of its warehouses at an $86,350 loss.

Instructions
Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You
should explain why these treatments are weaknesses and what the proper presentation of the items would be in
accordance with GAAP.
CA4-6 (Classification of Income Statement Items) As audit partner for Grupo and Rijo, you are in charge of
reviewing the classification of unusual items that have occurred during the current year. The following material
items have come to your attention.
1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other
periods is correctly computed.
2. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased 10
years ago for $21,000. The Invicta is the only such display item the dealer owns.
3. A drilling company during the current year extended the estimated useful life of certain drilling
equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered.
4. A retail outlet changed its computation for bad debt expense from 1% to of 1% of sales because of
changes in its customer clientele.
5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller)
continues to engage in uranium mining in other countries.
6. A steel company changes from the average-cost method to the FIFO method for inventory costing
purposes.
7. A construction company, at great expense, prepared a major proposal for a government loan. The loan
is not approved.
8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the
year.
9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in
the current year.
10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be
killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.
11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two
distinguishable classes of customers) decides to discontinue the division that sells to one of the two
classes of customers.
Instructions
From the foregoing information, indicate in what section of the income statement or retained earnings statement
these items should be classified. Provide a brief rationale for your position.