Question

Norse Manufacturing Inc. prepares an annual single, continuous statement of income and comprehensive income. The following situations occurred during the company’s 2021 fiscal year:

1. Restructuring costs were incurred due to the closing of a factory.

2. Investments were sold, and a loss was recognized.

3. A positive foreign currency translation adjustment was recognized.

4. Interest expense was incurred.

5. A division was sold that qualifies as a separate component of the entity according to GAAP.

6. Obsolete inventory was written off.

7. The controller discovered an error in the calculation of 2020’s patent amortization expense.

Required:

1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):

   1. As a component of operating income

   2. As a nonoperating income item (other income or expense)

   3. As a discontinued operation

   4. As an other comprehensive income item

   5. As an adjustment to retained earnings
      

2. Identify the situations that would be reported net-of-tax.

Answer 1

1.

It is reported as a Component of Operating Income

Restructuring costs incurred due to closing of a factory is placed under operating income

2.

It is treated as a Non operating Income

The recognised loss on investments sold is a component of non operating income

3.

It is treated as a other comprehensive income

A foreign currency translation income adjustment is an other comprehensive item

4.

Interest Expense is accounted in non operating income as other expenses

Interest expense is an non operating expense to be business (assumed as dealing in money market is not its main business)

5.

It is treated as discontinued operations

A division sold that qualifies as a seperate component as per GAAP is treated as discontinued operations

6.

As a Component of Operating Income

Obsolete inventory is a part of its business expense and is treated as part of operating income statement

7.

It is treated as adjustment to retained earnings

Previous year's error in calculation of the patent amortization is to be treated as adjustment to retained earnings

Of all the above situations, few are reported net of tax

1. Other comprehensive item (foreign currency translation adjustment) are to be taken net of taxes and then add to Equity.

2. Discontinued operations (division qualified as seperate component)

These are reported net of tax

3. Adjustment to retained earnings (error in calculation) would be reported to net of tax and this net of tax amount to be added to retained earnings