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Chapter 4: Question 37Q (page 180)

How should the disposal of a component of a business be disclosed in the income statement?

Short Answer

Expert verified

Disclosure of a disposed component is based upon its nature, i.e., continued or discontinued.

Step by step solution

01

Meaning of Income Statement

An income statement is a report drafted annually by the business entities to ascertain their profit or losses from the operational and non-operational functions. An income statement contains the description of revenues and expenses.

02

Disclosure of disposal of a business component

If a business concern disposes of its component, then the outcome must be disclosed in the income statement. Disposal may result in either gain or loss.

If such a component belongs to business operations, the outcome can be reported in the continuing operation section.

In comparison, if a component belongs to non-operating operations, then the company should report the gain or loss as an extraordinary item separately in the discontinued operations section.

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Most popular questions from this chapter

The financial statements of P&G are presented in Appendix B. The company鈥檚 complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G鈥檚 financial statements and the accompanying notes to answer the following questions.

(a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information.

(b) What are P&G鈥檚 primary revenue sources?

(c) Compute P&G鈥檚 gross profit for each of the years 2012鈥�2014. Explain why gross profit decreased in 2014.

(d) Why does P&G make a distinction between operating and nonoperating revenue?

(e) What financial ratios did P&G choose to report in its 鈥淔inancial Summary鈥� section covering the years 2009鈥�2014?

During 2017, Liselotte Company reported income of \(1,500,000 before income taxes and realized a gain of \)450,000 on the disposal of assets related to a discontinued operation. The criteria for classification as a discontinued operation is appropriate for this sale. The income is subject to income taxation at the rate of 34%. The gain on the sale of the plant is taxed at 30%. Indicate an appropriate presentation of these items in the income statement.

What is meant by 鈥渢ax allocation within a period鈥�? What is the justification for such practice?

Discuss the appropriate treatment in the income statement for the following items:

(a) Loss on discontinued operations.

(b) Non-controlling interest allocation.

(c) Earnings per share.

(d) Gain on sale of equipment.

How can earnings management affect the quality of earnings?
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