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Separately Reported Items. Separately Reported Items. Three types of events are reported separately, net of taxes:. 1. 2. 3. Intraperiod Income Tax Allocation. Income Tax Expense must be associated with each component of income that causes it.

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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.

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.


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Discontinued Operations

  • Sale or disposal of a component of an entity.

  • A component includes:

    • Reportable segments

    • Operating segments

    • Reporting units

    • Subsidiaries

    • Asset groups


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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.


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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.


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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.


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Discontinued Operations Example Sell)

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?


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Discontinued Operations Example Sell)

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


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Discontinued Operations Example Sell)

Income Statement Presentation:


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


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Extraordinary Items Sell)

  • Material in amount

  • Gains or losses that are

    • unusual in nature and

    • infrequent in occurrence.

    • required by GAAP.

  • Reported net of related taxes


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Extraordinary Items Sell) 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?


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Extraordinary Items Sell) Example

Income Statement Presentation:


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Unusual or Infrequent Items Sell)

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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Change in Accounting Principle Sell)

  • 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 Sell)

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: Sell)

Change in Accounting Principle Example


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Change in Estimates Sell)

  • 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 Estimates Sell) 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.


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Change in Estimates Sell) Example

Record depreciation expense of $4,200 for

2003 and subsequent years.


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Change in Reporting Entity Sell)

Financial statements are prepared for separate entities.


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Change in Reporting Entity Sell)

If two entities combine, a single set of consolidated financial statements is generally required.


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Change in Reporting Entity Sell)

  • If two entities combine:

  • Prepare a single set of consolidated financial statements.

  • Retroactively restate financial statements of prior periods.


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Prior Period Adjustments Sell)

  • 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.


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Prior Period Adjustments Example Sell)

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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Prior Period Adjustments Example Sell)

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

Can we just reverse it?

Why or why not?


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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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Prior Period Adjustments Example Depreciation since it is a permanent account.

We can’t creditDepreciation Expense

since it was closed in 2003, so we credit

Retained Earnings.


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Prior Period Adjustments Example Depreciation since it is a permanent account.

Remember to consider the tax effects:

$25,000 × 30% = $7,500 taxes payable


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Application Depreciation since it is a permanent account.Problem 21-14 SST Page 1071


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Next Time …. Depreciation since it is a permanent account.

Coach’s Cash Flows


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