Problem:
You have recently been hired as accounting staff at Winnie Manufacturing Company. The company is preparing its December 31, 2012 financial statements and there were a number of unusual transactions that occurred during the past year. The accounting department needs to determine the appropriate Income Statement classification for these items.
Your supervisor, Nancy Moreno, believes that these items are all extraordinary and should be classified in the Extraordinary Item section of the Income Statement. However, she has asked you to research Extraordinary Items in the Codification to confirm the appropriate treatment. She would like you to prepare a memo (including all appropriate sections) addressed to her. The purpose of this memo is to convey your recommendation for whether each of these items should be classified as Extraordinary on the Income Statement. As part of your research, she would like you to answer the following questions and include the answers in your memo to support your recommendation.
Be sure to include all Codification references supporting your research.
1. What is the definition of an Extraordinary Item?
2. What is the difference between an Extraordinary Item and Unusual or Infrequently Occurring Item?
3. Based on the criteria in the Codification (include the reference for each item separately), explain whether each of the following transactions would be reported as an Extraordinary Item or an Unusual Item, and why.
a. A law was passed during 2012 prohibiting the sale of one of Winnie's products. As a result of this law Winnie incurred a $500,000 loss on inventory that was already manufactured, as well as the equipment that had been used to manufacture the product.
b. At the beginning of 2012, Winnie was primarily a manufacturer, but it had one in-house distribution unit that delivered its products in Maine. During 2012, that unit was sold to another company for a $25,000 loss. Winnie is now 100% a manufacturing company.
c. An analysis of inventory during the year led to a $50,000 write-off of inventory that had become obsolete. Winnie had never taken a write-off for a decline in inventory value before.
d. Winnie sustained a loss of $350,000 as a result of damage to a warehouse from an earthquake.
e. The employees at one of Winnie's manufacturing facilities went on strike for 2 weeks in the summer, resulting in a loss of $100,000. Winnie's management has always had good relations with the unions and had never had a strike before, nor do they expect to have one again.
f. Winnie had a parcel of land attached to one of its manufacturing facilities that it had purchased 5 years ago. It was intended to be used in the expansion of the facility, but during 2012 Winnie sustained a $75,000 loss when the state exercised its right of eminent domain and put a road on the property.
g. Winnie has a policy of trading in its equipment at the end of its useful life and applying the value against the purchase of new equipment. However, during the year another manufacturing company offered Winnie a very good price for the sale of one of its machines, so Winnie sold the machine at a $50,000 gain. It does not expect to sell more equipment in the future.