Income Statement Other Items

Medium Test

Medium Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. One of the requirements to report a sale of a component as discontinued operations is that

a. the current management team must be reorganized
b. management will not have any future involvement in the component
c. the management team will continue managing the component
d. employees must be offered a significant severance

Answer
B. A company with discontinued operations must not have any future continuing involvement with the management of the component. Reorganizations occur with restructuring of operations. The company is not required to offer severance to employees who lose their positions due to the sale of the component 

2. Income from a discontinued operation is reported after tax because

a. the income is not taxable
b. the income tax is not paid until after the sale occurs
c. income tax expense is reported above discontinued operations and the income is taxable.
d. the income is taxable only in the period the sale occurs

Answer
C. Income from discontinued operations is taxable in the year it is earned. Discontinued operations is reported below tax expense and is not included in income before tax. When the tax is paid is not relevant to when tax expense is reported on the income statement.

3. Which of the following is not true relative to the reporting of earnings per share?

a. weighted average outstanding common shares is used
b. it is not reported for discontinued operations
c. it is reported separately for each item after income from continuing operations
d. all of the above is true

Answer
B. Earnings per share is required to be reported for all items after tax expense, beginning with income from continuing operations and including discontinued operations, extraordinary items, and net income.

4. A loss that is unusual in nature should be reported as

a. part of income from continuing operations
b. an operating expense
c. an extraordinary item
d. an unusual item

Answer
A. A loss that is unusual only is reported as part of other revenues and expenses which is included in income from continuing operations. It is not part of day to day operations (operating expenses). To be reported as an extraordinary item it must be unusual and infrequent.

5. Comprehensive income must only be reported

a. on the bottom of the income statement
b. on a separate statement of other comprehensive income
c. in the footnotes
d. none of the above

Answer
D. A company has the choice of how they report comprehensive income. It may be reported on the income statement after net income or on a separate statement of other comprehensive income. It is always reported as part of owner’s equity on the balance sheet.

6. Current comprehensive income items do not include

a. unrealized gains/losses from holding investments short term
b. gains/losses from employee benefit plans
c. gains/losses on derivatives
d. foreign currency gains/losses

Answer
A. Gains and losses on investments that are held long-term are included in comprehensive income. All other items listed are comprehensive income items.

7. Which of the following items would be reported as other revenue or expense?

a. advertising expense
b. rent expense
c. interest expense
d. income tax expense

Answer
C. Interest expense is reported as an “other expense” that is not part of day to day business of dealing with customers.

8. The difference in basic earnings per share and diluted earnings per share is related to the

a. preferred dividends declared
b. the period the earnings occur
c. the number of shares the company is authorized to issue
d. the number of shares the company is currently contingently obligated to issue

Answer
D. The difference in basic and diluted earnings per share is that diluted includes potential shares that the company could be required to issue due to currently existing agreements.

9. Earnings per share reports

a. earnings for all shares outstanding
b. earnings in total for the company
c. earnings per common share outstanding
d. the proforma future earnings potential of the company

Answer
C. Earnings per share is based on GAAP and is earnings per common share.

10 Which of the following require a footnote disclosure when it is material?

a. a change in accounting methods
b. a correction of an error that occurred in prior periods
c. a discontinued operation
d. all of the above

Answer
D. All material unusual transactions require a footnote disclosure explaining the impact on the reported financial statements.

11. A company had the following information. Income from continuing operations already includes all items that should be included.

Income from continuing operations before tax 1,100,000
Loss from a fire in a warehouse 205,000
Gain from a sale of equipment 84,000
Current period income from operations held for sale 108,000
Projected income from operations held for sale 92,000
Impairment loss on assets of a component held for sale 250,000
Costs to lay off employees and close one out of six stores 40,000
Income tax rate is 40%

Prepare the income statement for the company beginning with income from continuing operations before tax. Operations held for sale does qualify as a component.

Answer

1st – Determine the items that are already included in income from continuing operations before tax:
Loss from a fire: reported as other revenue/expense
Lay off costs: restructuring expense reported as operating expenses
Gain from sale of equipment

Do not do anything with these items since they are already included in income from continuing operations before tax of $1,100,000.

2nd : Compute the tax and after tax amounts for each separately reportable item

  Before tax Tax After Tax
Current period income from… 108,000 43,200 64,800
Impairment loss from assets 250,000 100,000 150,000

Projected income, gain or loss is not reported in the current period

3rd Write the format and drop in the numbers:

Income before tax : $1,100,000
Tax expense $ (440,000)
Income from continuing operations: $ 660,000
   
Discontinued Operations:  
Income from discontinued operations, net of tax $43,200 $ 64,800
Impairment loss on assets held for sale, net of tax $100,000 $ (150,000)
Total Discontinued Operations  $ (85,200)
Net Income $ 574,800

12. A retail company operates 100 stores in 4 major geographical areas. During the current year, the company spent $1 million to complete a significant remodel of stores in one of the geographical areas. On March 1st of the current year the company decided to close all the stores in another major geographical area. This area generated $500,000 in total losses during the current year. $200,000 of the total operating losses occurred in the prior year. The geographic area to be closed is expected to generate income in the next year of approximately $350,000 and is expected to be sold next year for a gain of $600,000. Assets held for sale have a fair market value greater than book value by $200,000. The income tax rate is 40%. All amounts are stated before tax.

The company’s total after tax income from continuing operations is $1,600,000 before considering the above items.

Prepare the income statement for the company beginning with income from continuing operations.

Answer
Income before tax : $1,666,667
   Tax expense ($666,667)
Income from continuing operations: $1,000,000
Discontinued Operations:
   Loss from discontinued operations, net of tax $200,000 $ (300,000)
            Net Income $ 700,000

Income from continuing operations after tax of $1,600,000 must be divided by one less the tax rate of 40% or 60% = $2,666,667 is the before tax amount.

This amount is reduced by the restructuring expense of $1,000,000 that is reported as an operating expense and reduces income from operations before tax.
The adjusted income before tax is $1,666,667.

Include all income or loss from operations held for sale during the current year.

No impairment loss occurs when assets have a fair market value greater than book value. Expected income and gains are reported in the period that it happens.

13. An accountant was presented with the following before tax amounts related to a manufacturing company:

Gain on foreign currency exchange 20,000
Loss from operations on a component held for sale 62,000
Gain on the sale of equipment 8,000
Gain on the sale of a component held for sale 90,000
Unrealized holding loss on long term investments (OCI) 5,000
Income tax rate 40%

The company reports Comprehensive Income on the income statement.
The Company has 100,000 common shares outstanding and 50,000 preferred shares outstanding.
No preferred dividends were declared or paid.

Prepare the income statement beginning with Income before tax of $850,000 before considering the above items.

Answer
Income before tax before considering listed items $850,000
   Items reported before income before tax:  
Gain on the sale of equipment       8,000
Adjusted Income Before Tax: 858,000

Income Statement:

Income Before Tax 858,000
           Tax Expense (343,200)
Income from continuing operations: 514,800
   
Discontinued Operations:
Loss from discontinued operations, net of tax $24,800 (37,200)
Gain on sale of discontinued operations, net of tax of $36,000 54,000
Total discontinued operations 16,800
          Net Income $531,600
Gain on foreign currency exchange, net tax of $8,000 12,000
Unrealized holding loss, net of tax savings of $2,000 (3,000)
            Comprehensive Income $466,800

Earnings per share:

Continuing operations $5.15
Discontinued Operations $0.17
Net Income $5.32