Page 535 - Accounting Principles (A Business Perspective)

13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock

Anson Company
Income Statement
For the Year Ended 2010 December 31
Net sales $41,000,000
Other revenues 2,250,000
Total revenue $43,250,000
Cost of goods sold $22,000,000
Administrative, selling, and general expenses 12,000,000 34,000,000
Income before federal income taxes $9,250,000
Deduct: Federal income taxes (40%) 3,700,000
Income from continuing operations $5,550,000
Discounted operations:
Loss from operations of discontinued Cosmetics
Division (net of 40% tax effect of $800,000) $(1,200,000)
Loss on disposal of Cosmetics Division (net of 40% (1,500,000)
tax effect of $200,000) (300,000)
Income before extraordinary item and the $4,050,000
cumulative effect of a change in accounting principle
Extraordinary item:
Gain on sale of subsidiary over book value $40,000
Less: Tax effect (40%) 16,000 24,000
Income after extraordinary item $4,074,000
Net income $4,074,000
Earnings per share of common stock:
Income from continuing operations $ 5,550
Discontinued operations (1.500)
Extraordinary item 0.024
Net income $4.074
Exhibit 104: Income statement
Net income inclusions and exclusions

Accounting has long faced the problem of what to include in the net income reported for a period. Should net
income include only the revenues and expenses related to normal operations? Or should it include the results of
discontinued operations and unusual, nonrecurring gains and losses? And further, should the determination of net
income for 2010, for example, include an item that can be clearly associated with a prior year, such as additional
federal income taxes for 2009? Or should such items, including corrections of errors, be carried directly to retained
earnings? How are the effects of making a change in accounting principle to be reported?
APB Opinion No. 9 (December 1966) sought to provide answers to some of these questions. The Opinion

directed that unusual and nonrecurring items having an earnings or loss effect are extraordinary items (reported in
the income statement) or prior period adjustments (reported in the statement of retained earnings). Extraordinary
items are reported separately after net income from regular continuing activities.
In Exhibit 104 and Exhibit 106, we show the reporting of discontinued operations, extraordinary items, and
prior period adjustments. For Exhibit 104 and Exhibit 106, assume that the Anson Company has 1,000,000 shares
of common stock outstanding and the company's earnings are taxed at 40 per cent. Also, assume the following:
• Anson sold its Cosmetics Division on 2010 August 1, at a loss of USD 500,000. The net operating loss of

that division through 2010 July 31, was USD 2,000,000.
• Anson had a taxable gain in 2010 of USD 40,000 from a sale of a subsidiary at an amount greater than what
was on the company's balance sheet (extraordinary item).
• In 2010, Anson discovered that the USD 200,000 cost of land acquired in 2009 had been expensed for both
financial accounting and tax purposes. A prior period adjustment was made in 2010.
Next, we explain the effects of these assumptions in greater detail.

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