Separately Reported Items

1. Separately Reported Items

2. Separately Reported Items Three types of events are reported separately, net of taxes: 1. 2. 3.

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 ChangesNET OF INCOME TAXES.

4. Discontinued Operations • Sale or disposal of a component of an entity. • A component includes: • Reportable segments • Operating segments • Reporting units • Subsidiaries • Asset groups

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.

6. Discontinued Operations Results of operations include two items: • The income or loss stream for the period from the identifiable discontinued operation. • The actual gain or loss from disposal of the component or an “impairment loss” if the component is held for resale.

7. Carrying Value of Assets > (Fair Value of Assets - Cost to Sell) Discontinued Operations • Results of operations include two items: • The income or loss stream for the period from the identifiable discontinued operation. • The actual gain or loss from disposal of the component or an “impairment loss” if the component is held for resale.

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?

9. Discontinued Operations Example Computation of Loss from Discontinued Operations (Net of Tax Effect):

10. Discontinued Operations Example Income Statement Presentation:

11. Another Example: Kandon EnterprisesE4-8 (p. 206)

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

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?

14. Extraordinary Items Example Income Statement Presentation:

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.

16. Application Case 4-8 (page 214)

17. Accounting Changes

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.

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?

20. Computation: Change in Accounting Principle Example

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.

22. Change in EstimatesExample 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.

23. Change in EstimatesExample Record depreciation expense of $4,200 for 2003 and subsequent years.

24. Change in Reporting Entity Financial statements are prepared for separate entities.

25. Change in Reporting Entity If two entities combine, a single set of consolidated financial statements is generally required.

26. Change in Reporting Entity • If two entities combine: • Prepare a single set of consolidated financial statements. • Retroactively restate financial statements of prior periods.

27. Prior Period Adjustments • Corrections of errors from a previous period. • Appear on the Statement of Retained Earningsas an adjustment to beginning retained earnings. • Must show the adjustment net of income taxes.

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.

29. Prior Period Adjustments Example If this was the original entry, how do we correct it? Can we just reverse it? Why or why not?

30. To correct the 2003 error in 2004, we can debit Accumulated Depreciation since it is a permanent account. Prior Period Adjustments Example

31. Prior Period Adjustments Example We can’t creditDepreciation Expense since it was closed in 2003, so we credit Retained Earnings.

32. Prior Period Adjustments Example Remember to consider the tax effects: $25,000 × 30% = $7,500 taxes payable

33. Application Problem 21-14 SST Page 1071

34. Next Time …. Coach’s Cash Flows