- This topic has 2 replies, 3 voices, and was last updated 5 years, 6 months ago by .
-
Topic
-
Kell Corp. reported $111,000 of net income for the quarter ended September 30, 2005. Additional information for the quarter:
A $60,000 extraordinary gain, realized on April 30, 2005, was allocated equally to the second, third, and fourth quarters of 2005.
A $16,000 cumulative-effect adjustment (dr.) resulting from a change in inventory valuation method was recognized on August 2, 2005. The new method was used for the quarter ended September 30. The $111,000 earnings amount does not reflect the cumulative effect.
In addition, Kell paid $48,000 on February 1, 2005, for 2005 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of 2005.
For the quarter ended September 30, 2005, Kell should report net income of:
Answer:
The extraordinary gain should be recognized entirely in the second quarter. There is no meaningful basis on which to allocate the gain. It is a one-time occurrence. The cumulative effect is not recognized in income. The firm’s treatment of the property tax cost is correct. The cost relates to the entire year. Therefore, each quarter should bear 1/4 of the cost.
Third quarter net income = $91,000 = $111,000 – $60,000/3.
My question is, if the answer says that the extraordinary gain should be recognized entirely in the 2nd quarter, then why in the explanation does it include the 60,000 extraordinary amount to calculate 3rd quarter net income?
- You must be logged in to reply to this topic.