Question

When Company Roo buys all the outstanding stock of Company Road-Runner for $500,000, company Road-Runner had Net Income of $150,000 and paid dividends of $11,000. The valuation method used is the acquisition method.

What is the journal entry to be shown on the parents' books, Company Roo?

Explain precisely what extraordinary items are and then the reasoning of why the IFRS does not allow them?

Answer 1

Investment in Company Road-Runner	139000
Goodwill	361000
To Cash		500000

Investment in Company Road Runner --> 150000-11000 = 139000 (Since Dividend is paid, Retained earnings would stand at Rs 139000)

An extraordinary item is an event or transaction that is considered abnormal, not related to ordinary activities and unlikely to recur in the foreseeable future. Eg. damage due to Earthquake, hailstorm etc.

Initially, the intent behind reporting extraordinary items within separate line items in the income statement was to clarify for the reader which items were totally unrelated to the operational and financial results of a business.

However, the reporting of an extraordinary item used to be an extremely rare event. In most cases, an event or transaction was considered to be part of the normal operating activities of a business. Thus, a business might never report an extraordinary item.  

(FASB) eliminated the concept of extraordinary items from U.S. GAAP in order to reduce the cost and complexity of preparing financial statements. The Board decided that items treated as extraordinary result from the normal business risks faced by an entity and do not warrant presentation in a separate component of the income statement. The nature or function of a transaction or other event, rather than its frequency, should determine its presentation within the income statement. Items currently classified as ‘extraordinary’ are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity’s future performance