Income Statement

Question 1

Stall Technologies, Inc., decided to discontinue operations of a component on October 1, Year 1. The same day, Stall committed to a plan to sell the component. The following information is available for Rev at the end of Year 1:

• Carrying amount $1,700,000
• Fair value 2,000,000
• Cost to sell 350,000

Ignoring income tax effects, what is the journal entry to record this discontinued operation?

Answer 1

Asset impairment:

Loss on discontinued operations $50,000
Component $50,000

A component that is classified as held for sale is measured at the lower of its carrying amount ($1,700,000) or fair value minus cost to sell ($2,000,000 – $350,000 = $1,650,000). The impairment loss is $50,000 ($1,700,000 – $1,650,000).

Question 2

Stall Technologies, Inc., has a factory located in central Texas. For the past several years, Texas has experienced a severe drought. Last month, a torrential rain storm flooded Stall’s factory. The flood caused a pretax loss of $800,000. This event qualifies as an extraordinary item. If Stall is subject to a 30% income tax rate, what is the journal entry to record this loss?

Answer 2

Loss from extraordinary item $560,000
Income tax benefit 240,000
Cash $800,000

Question 3

Potential common stock is dilutive if its inclusion in the calculation of EPS results in a reduction of EPS (or an increase in loss per share).

True or False

Answer 3

True.

Potential common stock is dilutive if its inclusion in the calculation of EPS results in a reduction of EPS (or an increase in loss per share).

Question 4

To determine the dilutive effect of convertible securities on diluted earnings per share, conversion is assumed to have occurred at the later of the beginning of the period or the time of issuance.

True or False

Answer 4

True.

The if-converted method is used to determine the dilutive effect of convertible securities on diluted EPS (DEPS). The if-converted method assumes that the convertible security was converted at the beginning of the period or time of issuance, if later.

Question 5

Under the deposit method, revenue or profit is recognized when cash is received.

True or False

Answer 5

False.

Under the deposit method, when cash is received, no revenue or profit is recognized because it has not been earned. “Cash” is debited and “Deposit liability” is credited.