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Separately Reported Items

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Separately Reported Items

Three types of events are reported separately, net of taxes:

1.

2.

3.

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Intraperiod Income Tax Allocation

Income Tax Expense must be associated with each component of income that causes it.

Income Tax Expense must be associated with each component of income that causes it.

Show Income Tax Expense related to

Income from Continuing Operations.

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.

Report effects of Discontinued Operations, Extraordinary

Items, and Cumulative Effect of Accounting Changes NET OF

INCOME TAXES.

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• Sale or disposal of a component of an entity.

• A component includes:• Reportable segments• Operating segments• Reporting units• Subsidiaries• Asset groups

Discontinued Operations

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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.

Discontinued Operations

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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.

Discontinued Operations

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• 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.

Discontinued Operations

Carrying Value of Assets > (Fair Value of Assets - Cost to Sell)

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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?

Discontinued Operations Example

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Discontinued Operations Example

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

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Income Statement Presentation:

Discontinued Operations Example

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

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• Material in amount• Gains or losses that

areunusual in nature andinfrequent in

occurrence.required by GAAP.

• Reported net of related taxes

Extraordinary Items

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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?

Extraordinary Items Example

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Income Statement Presentation:

Extraordinary Items Example

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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.

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Application Case 4-8 (page 214)

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Type of Accounting Change Definition

Change in Accounting Principle

Replaces one GAAP with another

Change in Accounting Estimate

Revision of an estimate because of new information or new experience

Change in Reporting Entity

Change from reporting as one type of entity to another type of entity

Accounting Changes

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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.

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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?

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Computation:

Change in Accounting Principle Example

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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.

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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.

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Asset cost 30,000$ Accumulated depreciation 12/31/02 - ($3,000 × 3 years) (9,000) Remaining to be depreciated 21,000 Remaining useful life ÷ 5 yearsRevised annual depreciation 4,200$

Record depreciation expense of $4,200 for2003 and subsequent years.

Change in EstimatesExample

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Change in Reporting Entity

Financial statements

are prepared for separate

entities.

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Change in Reporting Entity

If two entities combine, a single set of consolidated financial statements

is generally required.

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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.

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• 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.

Prior Period Adjustments

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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.

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GENERAL JOURNAL Page: 180Date Description PR Debit Credit

12/31/03 Depreciation Expense 150,000

Accumulated Depreciation 150,000

If this was the original entry, how do we correct it?

Can we just reverse it? Why or why not?

If this was the original entry, how do we correct it?

Can we just reverse it? Why or why not?

Prior Period Adjustments Example

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GENERAL JOURNAL Page: 180Date Description PR Debit Credit

2004 Accumulated Depreciation 25,000

2004 Entry

To correct the 2003 error in 2004, we can debit Accumulated Depreciation since it is

a permanent account.

To correct the 2003 error in 2004, we can debit Accumulated Depreciation since it is

a permanent account.

Prior Period Adjustments Example

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GENERAL JOURNAL Page: 180Date Description PR Debit Credit

2004 Accumulated Depreciation 25,000

Retained Earnings 17,500

2004 Entry

We can’t credit Depreciation Expensesince it was closed in 2003, so we credit

Retained Earnings.

We can’t credit Depreciation Expensesince it was closed in 2003, so we credit

Retained Earnings.

Prior Period Adjustments Example

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GENERAL JOURNAL Page: 180Date Description PR Debit Credit

2004 Accumulated Depreciation 25,000

Income Taxes Payable 7,500

Retained Earnings 17,500

2004 Entry

Remember to consider the tax effects:$25,000 × 30% = $7,500 taxes payableRemember to consider the tax effects:$25,000 × 30% = $7,500 taxes payable

Prior Period Adjustments Example

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Application Problem 21-14 SST Page 1071

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Next Time ….

Coach’s Cash Flows