Question

The following events occurred during 2021 for various audit clients of your firm. Consider each event to be independent and the effect of each event to be material.

1.) A manufacturing company recognized a loss on the sale of investments.

2.) An automobile manufacturer sold all of the assets related to its financing component. The operations of the financing business is considered a component of the entity.

3.) A company changed its depreciation method from the double-declining-balance method to the straight-line method.

4.) Due to obsolescence, a company engaged in the manufacture of high-technology products incurred a loss on inventory write-down.

5.) One of your clients discovered that 2020’s depreciation expense was overstated. The error occurred because of a miscalculation of depreciation for the office building.

6.) A cosmetics company decided to discontinue the manufacture of a line of women’s lipstick. Other cosmetic lines will be continued. A loss was incurred on the sale of assets related to the lipstick product line. The operations of the discontinued line is not considered a component of the entity.

Required: Determine whether each of the above events would be reported as income from continuing operations, income from discontinued operations, or not reported in the current year’s income statement.

Additionally: There is a component required for discontinued operations. Please review your answer using the component requirement. If an item is in continuing operations, please state the line where it would be reported. (This is what I need assistance with)

Answer 1

Answer:

1.

The loss is not unusual or infrequent. It is included in income from continuing operations along with other nonoperating items.

2.

The sale of the financing component is treated as a discontinued operation. The gain or loss from the sale of the assets along with income or loss generated by the component is presented below income from continuing operations.

3.

A change in depreciation method is treated as a change in accounting estimate achieved by a change in accounting principle. Changes in estimates are accounted for prospectively. The remaining book value is depreciated, using the new method, over the remaining useful life.

4.

This event is not unusual but may be infrequent. It usually is presented as a separate line item included in income from continuing operations.

5.

The correction of an error is treated as a prior period adjustment. The effect of the correction is not included in income, but as an adjustment to retained earnings. Prior years' financial statements are restated to correct the error.

6.

This event requires no unusual treatment. The lipstick line does not qualify as a component of an entity requiring treatment as a discontinued operation. The loss on sale of the assets of the product line is included in continuing operations.