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Question 4BE

Intermediate Accounting (Kieso)
Found in: Page 181

Short Answer

Finley Corporation had income from continuing operations of $10,600,000 in 2017. During 2017, it disposed of its restaurant division at an after-tax loss of $189,000. Prior to disposal, the division operated at a loss of $315,000 (net of tax) in 2017 (assume that the disposal of the restaurant division meets the criteria for recognition as a discontinued operation). Finley had 10,000,000 shares of common stock outstanding during 2017. Prepare a partial income statement for Finley beginning with income from continuing operations.

The Earning Per share is $1.0096

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Step by Step Solution

Meaning of income from continuing operations

Income from continuing operations is an important element to know the performance of regular business activities. It is reported on the company's income statement.

Preparing a partial income statement


Amount ($)

Income from continuing operations (A)


Discontinued Operations

Loss from operation of discontinued restaurant division (net of tax) (B)


Loss from disposal of restaurant division (net of tax) (C)


Net Income (A-B-C)


Earnings per share


Working Notes

  1. Calculation of Earnings per share

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Question: As audit partner for Grupo and Rijo, you are in charge of reviewing the classification of unusual items that have occurred during the current year. The following material items have come to your attention.

1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed.

2. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased for $21,000 10 years ago. The Invicta is the only such display item the dealer owns.

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4. A retail outlet changed its computation for bad debt expense from 1% to ½ of 1% of sales because of changes in its customer clientele. Concepts for Analysis 191 192 Chapter 4 Income Statement and Related Information.

5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries.

6. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes.

7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved.

8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year.

9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year.

10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.

11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers. This represents a strategic shift in the company business.


From the foregoing information, indicate in what section of the income statement or retained earnings statement these items should be classified. Provide a brief rationale for your position.

Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As an auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president.

Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.

Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations.

Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be subject to reporting outside operating income?

Controller: I am not sure whether this item should get special reporting or not.

Vice President: Oh well, it doesn’t make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.


  1. On the basis of the foregoing discussion, answer the following questions. Who is correct about handling the sale? What would be the correct income statement presentation for the sale of the Casino Knights Division?
  2. How should the walkout by the employees be reported?
  3. What do you think about the vice president’s observation of materiality?
  4. What are the earnings per share implications of these topics?

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