Question

Hi

For Q.110, I did not understand why "Loss on disposal of equipment $18,000" (being an extraordinary item) is included in the calculation because of the question "  Income before extraordinary item"?

For Q.112,113 Please explain the principle of total infrequent net gains losses that not considered extraordinary.

110. Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2014 included the following:

                                                                                             Debit            Credit                                                                              

Sales revenue                                                                                               $280,000

Cost of goods sold                                            $150,000

Administrative expenses                                      40,000

Loss on disposal of equipment                             18,000

Sales commission expense                                  16,000

Interest revenue                                                                                               10,000

Freight-out                                                              6,000

Loss due to earthquake damage                          24,000

Bad debt expense                                                                                 6,000                                                                                                  

      Totals                                                                             $260,000 $290,000

            Other information:

            Logan's income tax rate is 30%. Finished goods inventory:

January 1, 2014                  $160,000

December 31, 2014              140,000

            On Logan's multiple-step income statement for 2014,

            Income before extraordinary item is

a.   $88,000.

b.   $54,000.

c.   $37,800. ($280,000 – $150,000 – $40,000 – $18,000 – $16,000 – $6,000 – $6,000 +      $10,000 – $16,200 = $37,800 )

d.   $21,000.

112.     Chase Corp. had the following infrequent transactions during 2014:

A $375,000 gain from selling the only investment Chase has ever owned.

A $525,000 gain on the sale of equipment.

A $175,000 loss on the write-down of inventories.

In its 2014 income statement, what amount should Chase report as total infrequent net gains that are not considered extraordinary?

a.   $200,000.

b.   $350,000.($525,000 – $175,000 = $350,000.)

c.   $725,000.

d.   $900,000.

James, Inc. incurred the following infrequent losses during 2014:

A $210,000 write-down of equipment leased to others.

A $120,000 adjustment of accruals on long-term contracts.

A $180,000 write-off of obsolete inventory.

In its 2014 income statement, what amount should James report as total infrequent losses that are not considered extraordinary?

a.   $510,000.

b.   $390,000.

c.   $330,000.

d.   $300,000.

Answer 1

For Q 110. Sale of fixed Asset is an infrequent transaction but not an unusual transaction, therefore this is not a extra ordinary item. For extraordinary item, the transaction should be infrequent & unusual transaction both.

For Q 112 Principle of total infrequent net gains losses that not considered extraordinary -

$525,000 gain on the sale of equipment & $175,000 loss on the write-down of inventories are infrequent transactions but not an unusual. Therefore, the same was not considered as extraordinary item in income statement. however, in case of sale of investment, it is written that gain from selling the only investment Chase has ever owned. It means it is a sale of investment that the Chase only has. Therefore, it is infrequent & unusual both as there is no history of selling that investment. Therefore, selling of investment transaction was not happened in history & will never recur in future also. This is the main principle of infrequent transactions that was not considered as extraordinary item.

For Q 113 In this case, all the transactions are infrequent but will not be considered as extraordinary item as these transactions are not unusual transactions & can be recurred again in future.