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Intermediate Accounting (Kieso)
Found in: Page 188

Short Answer

Question: Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017.

(000 omitted)

Net sales revenue $640,000

Costs and expenses

Cost of goods sold $500,000

Selling, general, and administrative expenses 66,000

Other, net 17,000

583,000

Income before income tax 57,000

Income tax 19,400

Net income 37,600

Retained earnings at beginning of period, as previously reported 141,000

Adjustment required for correction of error (7,000)

Retained earnings at beginning of period, as restated 134,000

Dividends on common stock (12,200)

Retained earnings at end of period $159,400

Additional facts are as follows.

1. “Selling, general, and administrative expenses” for 2017 included a charge of $8,500,000 that was usual but infrequently occurring.

2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000.

3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).

4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.

Instructions

Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)

As per the given scenario, the Nerwin Company requires some modifications in its presentation to reflect the data accurately.

Also, accurate presentation facilitates the users to draw effective financial decisions.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Financial Reporting

Financial reporting refers to the process of disclosing the financial data of a business concern with its associated stakeholders. The companies use financial statements to report their information to interested parties.

Step 2: Requirements for appropriate presentation

  1. The selling and administration expenses include a charge of $8,500,000 that was usual but infrequently occurring. The same should be reported as an extraordinary item because such an event is non-recurring.

  2. Loss on sale of equipment is the non-recurring activity of the business entity; hence the same should be disclosed separately under extraordinary items. Also, the remaining balance, i.e., $11,000,000, should be considered as other expenses, and a respective loss of $6,000,000 should be reported as an extraordinary item.

  3. The error correction treatment is correct because the same should be adjusted in the opening balance of the profit and loss account.

  4. The Nerwin Company should disclose the earnings per share below the net income in the income statement after deducting the preferred dividend from the net income.

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