Question

A strike by the employees of a supplier during the month of September 2019 resulted in a pre-tax loss of $125,000. This was considered an unusual loss and so was recorded as Other Comprehensive Income.

1. Is there an error?                            [ Select ]                       ["No, they should have reported it as OCI", "Yes, this should be reported as a part of ICO instead", "No, because it is reported as OCI it must have already been included as ICO"]      

2. What adjustment (if any) is needed to Desert's ICO for 2019?                            [ Select ]                       ["No adjustment is needed", "Reduce ICO $125,000", "Reduce ICO $87,500", "Increase ICO $125,000"]      

3. What adjustment (if any) is needed to Desert's Comprehensive Income for 2019?                            [ Select ]                       ["No adjustment needed", "Increase Comprehensive Income $125,000", "Increase Comprehensive Income $87,500"]      

Answer 1

1. Yes, there is an error, they should have reported it as a part of Income from Continuing Operations. If an item is considered to be of an unusual nature or is of type that is infrequently occurring, it is to be reported as part of income from continuing operations. It can be reported in income from continuing operations as a separate line item, or if not reported separately, then should be disclosed in the notes to the financial statements.

2. Reduce ICO $125,000. Since the loss is to recorded as a part of the Income from continuing operations, it should be reported there. The company made an error by reporting it in the Other Comprehensive Income part. This error should be corrected by in including it in the ICO. The gross amount should be provided.

3. No adjustment is to be made in Comprehensive Income for 2019, because Comprehensive Income equals net income plus Other Comprehensive Income. This error is self correcting. In the OCI part, it is recorded net of tax. Hence the error corrects itself in the comprehensive income statement.