Question

Morrison Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Division, which manages gambling facilities. As auditor for Morrison Corp., you have recently overheard the following discussion between the controller and financial vice-president.

VICE-PRESIDENT: If we sell the Casino Division, it seems ridiculous to segregate the results of the sale in income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.

CONTROLLER: Professional pronouncements would require that we disclose this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported an extraordinary item.

VICE-PRESIDENT: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be an extraordinary item?

CONTROLLER: I am not sure whether this item would be reported as extraordinary or not.

VICE-PRESIDENT: Oh well, it doesn’t make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.

On the basis of the foregoing discussion, answer the following questions:

Who is correct in handling the sale? What would be the correct income statement presentation for the sale of the Casino Division?

How should the walkout by the employees be reported? Justify your answer.

What do you think about the vice-president’s observation on materiality? Explain

What are the earnings per share implications of these topics? Discuss in detail.

Answer 1

Answer)

I feel Controller be the correct person to handle this issue.As per GAAP i.e Generally Accepted Accounting Policies Sale of any asset other than those in ordinary course of sale must be shown as extraordinary item in financial statements.Hence, Treating the sale of casino as extraordinary item will be correct presentation of income statement.

Loss due to walkout of employees should not be treated as extraordinary item as it is not unusual item but must be shown in separate line item in main portion of income statement.

The Vice President'' observation on materiality could have been better as he want to report the sale of casino as ordinary item and thinks only the net effect on income statement only matters but this is not an acceptable accounting practice as share holder and other persons have material interest have right to get informed about such type of unusual business transactions.

The implications on the earning per shares is they tend to decline as there was loss due to walkout of emplees.Futhur they may decline if there is loss on sale of asset or increase totally or proportion to the amount not capitalises if such profit may be capitalized into reserve.