Question

Krewatch, Inc., is a vertically integrated manufacturer and retailer of golf clubs and accessories (gloves, shoes, bags, etc.). Krewatch maintains separate financial reporting systems for each of its facilities. The company experienced the following events in 2017:

1. After several years of production problems at the accessories manufacturing plant, Krewatch sold the plant to an investor group headed by a former manager at the plant.
2. Krewatch incurred restructuring costs of $12,562,990 when it eliminated a layer of middle management.
3. Krewatch extinguished $200 million in 30-year bonds issued 18 years ago. Krewatch recognized a gain on this transaction.
4. Krewatch changed its method of accounting for inventory from FIFO to the average cost method. Sufficient information was available to determine the effect of this change on prior years’ earnings numbers.
5. Due to technological advances in golf club manufacturing, management determined that production equipment would need to be upgraded more frequently than in the past. Consequently, the useful lives of equipment for depreciation purposes were reduced.
6. The company wrote off inventory that was not salable.
7. Equipment was sold at a loss.

Required:

For each event, (1) identify the appropriate reporting treatment from the following list (consider each event to be material), and (2) indicate whether it would be included in income from continuing operations, would appear on the income statement below that subtotal, or would require retrospective application.

1. Change in accounting estimate.
2. Change in accounting principle.
3. Discontinued operation.
4. Unusual or infrequently occurring item.

Answer 1

	Event	Appropriate Accounting Treatment for each event to be material	Included in Income Statement from continuing operation/below subtotal /retrospective application
1	Event 1	It is a discontinuing operation.To qualify for discontinued operation treatment the sold component must be separable both operationally and financially from the rest of the operation.Further Krewatch cannot have any significant involvement in the operations of the sold component.	Would appear on the income statement below income from continuing operations.
2	Event 2	It would reported as a special ,non recurring or unusual item .Restructions may be infrequent in today's works so this event is not an extraordinary item	It would be included in income from continuing operations.
3	Event 3	It is an extraordinary item.To qualify for extraordinary treatment an extinguishment now must meet the unusual and infrequent test.It is given that the retired bonds were the only ones which are issued that appears to be met	It would appear on the income statement below income from continuing operations.
4	Event 4	It is a change in accounting principle	It would appear on the income statement below income from continuing operations.
5	Event 5	It is change in accounting estimate .Depreciation Expense in 2008 and beyond will be calculated using the new shorter lives.the range of equipment lives used for depreciation need to be adjusted in the notes to Krewatch financial statement	It would be included in income from continuing operations.
6	Event 6	It is a special ,non recurring or unusual item .Inventory write offs may be infrequent.but they are not unusual so it is not an extraordinary item.	It would be included in income from continuing operations.
7	Event 7	It is a special ,non recurring or unusual item .Equipment sales are considered a normal part of ongoing business activity	It would be included in income from continuing operations.