Question

Case 1

Question 1A-ES01

It is almost midnight on December 31, 20XX, and the bookkeeping program at Crank-M-Up, Inc. is malfunctioning. Instead of producing an income statement, it keeps printing an alphabetical list of accounts:

Administrative expenses                                                                                                                              $215,000

Cost of goods sold                                                                                                                                            408,500

Extraordinary casualty loss                                                                                                                             70,000

Income taxes                                                                                                                                                     54,900

Loss on inventory write-down (nonrecurring)                                                                                            13,000

Gain on foreign currency translation                                                                                                           19,500

Loss from discontinued operations                                                                                                              30,000

Sales                                                                                                                                                                   945,000

Selling expenses                                                                                                                                               145,000

*The practice essay questions for Section A are original questions and are not released ICMA questions.

Questions

1. As the new accountant for Crank-M-Up, your first job is to prepare the firm’s multiple-step income statement for 20XX with EPS disclosures in accordance with G.A.A.P. Crank-M-Up has 50,000 shares of common stock outstanding and has a 30% federal income tax rate.
2. Mark M. Down, the CEO of Crank-M-Up, is confused about the accounting treatment for irregular items on the income statement and wants you to explain: (1) Why GAAP requires special treatment for irregular items; (2) How to determine whether an item is unusual or extraordinary.

Answer 1

SOLUTION:-

Income Statement
For the Year Ending Dec 31, 20XX
Revenue	20XX ($)	20XX ($)
	Gross sales	945,000
	(Less sales returns and allowances)
	Net Sales	945,000
Cost of goods Sold
	Beginning inventory
	Goods purchased or manufactured
	Total Goods Avaliable
	(Less ending inventory)
	Cost of Goods Sold	408,500
	Gross Profit (Loss)	536,500
Expenses
	Selling expenses	145,000
	Administrative expenses	512,000
	Total Operating Expenses	360,000
Operating Income (Loss)	176,500
	Loss on inventory write-down	(13,000)		Had this amount been immaterial, it could have been adjusted to the cost of goods sold
	Gain on foreign currency translation	19,500
	Extraordinary items	(70,000)
	Income from continuing operations before Taxes	113,000
	(Less income tax expense)	(54,900)
Income From Continuing Operations	58,100
	Loss from discontinued operations net of taxes	(30,000)
Net Income for the year	28,100
	Earnings per share basic
	Income from continuing operations	116		$28,100 dividend by 50,000 shares
	(Loss) from diacontinud operations	(0.60)		($30,000) dividend by 50,000 shares
	Basic net earnings share	0.56
	Weighted average shares outstandin	50,000

1) Why GAAP requires special treatment for irregular items?

Ans:- It is important to report unusual or infrequent items separately to ensure the transparency of financial reporting as they are not considered part of normal business operations. However, following ASU 2015-01 the extraordinary iems has recently been eliminated under Generally Accepted Accounting Principles (GAAP). It can find a mention in the notes to the financial statements.

2) How to determine whether an item is unusual or extraordinary?

Ans:- An extraordinary item in accounting is an event or transaction that is considered abnormal, not related to ordinary company activities, and unlikely to recur in the foreseeable future.

Examples of unusual or infrequent items include gains or losses from a lawsuit; losses or slowdown of operations due to natural disasters; restruring costs; gains or losses from the sale of assets; costs associated with acquuiring another business; losses from the early retirement of debt; and plant shutdown costs.

However it is pertinent to note that from Dec 31,2015, following ASU 2015-01 the extraordinary items has recently been eliminated under Generally Accepted Accounting Principles (GAAP). It can find a mention in the notes to find financial statements.

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