Question

The preliminary 2021 income statement of Alexian Systems, Inc., is presented below:

Additional Information:
1. Selling and administrative expense includes $26 million in restructuring costs.
2. Included in other income is $120 million in income from a discontinued operation. This consists of $90 million in operating income and a $30 million gain on disposal. The remaining $6 million is from the gain on sale of investments.
3. Cost of goods sold was increased by $40 million to correct an error in the calculation of 2020’s ending inventory. The amount is material.

Required:

For each of the three additional facts listed in the additional information, discuss the appropriate presentation of the item described. Do not prepare a revised statement.

 

Answer 1

1.  

Restructuring is an example of an event that is material and unusual. Restructuring costs should be included in income from continuing operations but reported on a separate line. The item is reported gross, not net of tax as with discontinued operations.

 

2.  

The income from the discontinued operation should be presented, net of tax, in the income statement below income from continuing operations. Also, earnings per share for income from continuing operations, for the income from the discontinued operation, and for net income should be disclosed.

 

3.  

The correction of the error should be treated as a prior period adjustment to beginning retained earnings, not as an adjustment to current year's cost of goods sold. In addition, the 2020 financial statements should be restated to reflect the correction, and a disclosure note is required that communicates the impact of the error on 2020 income.

Restructuring is an example of an event that is material and unusual