Question

In: Accounting

Roseburg Corporation manufactures cardboard containers. In 2017, the company purchased several large tracts of timber for...

Roseburg Corporation manufactures cardboard containers. In 2017, the company purchased several large tracts of timber for $20 million
              with the intention of harvesting its own timber rather than buying timber from outside suppliers. However, in 2018, Roseburg abandoned
              the idea, and sold all of the timber tracts for $30 million. Net income for 2018, before considering the event, was $12 million.

Required:

Write a memo to include:
1. A journal entry to show how the sale and the gain on the sale will be accounted for.
2. A discussion of the alternatives (as part of operating income, as part of "other revenues and expenses", or as discontinued operations) that might be
     considered in reporting the gain on the sale.
3. Which of the three alternatives would you recommend to report the gain on the income statement. Explain.

Solutions

Expert Solution

a.b.The issue is whether to record the $10 million gain on sale in the income statement as part of operating income, other revenues and expenses, or extraordinary items. Roseburg might prefer to report the large gain as part of operating income as it would make their operations appear more profitable. However, the sale of the timber tracts is not part of their ordinary operations of manufacturing cardboard containers.
The sale or disposal of most long-term assets is reported as other revenues and expenses. This seems to be the best alternative as the sale of timber tracts is infrequent for Roseburg Corporation, but does not appear to be unusual in nature. If the sale of the timber tracts were both unusual in nature and infrequent in occurrence, the $10 million gain would be reported at the bottom of the income statement as an extraordinary item.

Finally, the $10 million gain might be reported as part of operating income, other revenues and expenses, or extraordinary items.

c.However, the best alternative in this situation is to report the $10 million gain as part of other revenues and expenses.


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