In: Accounting
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.
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.