Question

During the year 2018, Tosco Corporation suffered an $400,000 loss when its factory was destroyed in a flood. Assuming the corporate income tax rate is 20%, what amount will Tosco report as a non-recurring loss on its income statement for 2018? Assume floods are not common in this area.

rev: 07_04_2018_QC_CS-130717, rev: 11_21_2018_QC_CS-143121

• $80,000

• $320,000

• $400,000

• Nothing, since this does not qualify as a non-recurring item.

Answer 1

Ans: The correct option is Nothing, since this does not qualify as a non-recurring item

Non recurring items- Any activity in an organization or an tiem in the financial statements of the organization that is unusual or does not happen frequently are non recurring. They are show in the income statement. for e.g., mergers and acquisition, loss from discontinuing business operations, litigation charges etc.

Extraordinary item- Loss or gain in the financial statement that are not usual or unlikely to happen in the ordinary course of business are extraordinary items. Extraordinary items have material impact on the profitabilty of the firm. They have to be explained in detail in notes to the accounts. For e.g., loss from natural disaster- fires, earthquake, floods etc.

As the loss from flood of $400000 for Tosco corporation is not covered under Non recurring item, it can not report such loss.

This is an extraordinary item which has to be shown separately in notes to accounts in detail.