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Debit Credit
Common stock 1250000
Additional paid-in capital 2187500
Retained earnings 1/1/X4 1650000
Net sales 6250000
Cost of sales 3750000
Selling and administrative expenses 1212500
Interest expense 122500
Gain on extinguishment of debt 130000
Loss on sale of equipment 225000
Loss due to earthquake damage 700000
From the following items, select two that should be included in Pitt's statement of comprehensive income as
part of other comprehensive income.
1. False.
Gain on extinguishment of debt is either reported as part of extraordinary items or as part of income from
continuing operations, depending on the criteria included in APB Opinion No. 30 (per SFAS No. 145). In
Pitt's case, this is reported as a component of income from continuing operations on the income statement.
2. False.
In Pitt's case, the damage from the earthquake is reported as part of extraordinary items on the income
statement.
3. False.
The loss on discontinued operations of Kam Division is reported on Pitt's income statement as part of the
discontinued operations section.
4. True.
Unrealized gains on the sale of available-for-sale securities are reported as components of other
comprehensive income on the statement of comprehensive income.
5. True.
Per FAS 158, a change in pension plan funded status due to prior service cost is recognized in other
comprehensive income in the period of the change, until recognized as a component of net periodic
pension cost.
Note: The losses anticipated for future periods are not recognized until they occur.
3. Extraordinary items
A prohibition of a product line by the government would be deemed an extraordinary event in a business,
as it certainly unusual in nature and happens infrequently.
6. Discontinued operations
The results of operations of a component of an entity will be reported in the discontinued operations
section of the income statement if the component is deemed to have met all criteria for the "held for sale"
classification.
Type your communication in the response area below the horizontal line using the word processor provided.
Memorandum
To: Pitt Corp. Management Committee
Subject: Answers to specific Management Committee questions
Thank you for the opportunity to provide assistance by responding to your questions regarding the sale of the
Kam Division. I will address each question separately below.
Question #1:
If management would choose to present the financial statements for the year 20X3 along with the financial
statements for the year 20X4, the results of operations of the Kam Division for 20X3 and 20X4 would be
presented as components of discontinued operations in both years, even though the division was not deemed
“held for sale” in the year 20X3.
Question #2:
Even though the future expected losses up until the sale date were reasonably estimated at year-end
(12/31/X4) to be $50,000 in 20X5, losses that are expected to occur in future periods cannot be recognized
until they occur, according the to the requirements of SFAS No. 144.
Question #3:
The assets within the component of the Kam Division will not be depreciated or amortized after the division is
deemed to be in the “held for sale” classification.
I hope that this brief communication has adequately served your needs. Should you require anything further,
please feel free to call me.