Page 538 - Accounting Principles (A Business Perspective)

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One of the officers suggested that they could at least receive something for their stock by having the
company buy half of the shares held by the officers at a total price of USD 4 million. Another officer
asked if such a treasury stock transaction would be legal. The response was that the transaction
would be legal because it did not dip into the present legal capital of the company. Retained
earnings would be reduced to a zero balance, but would not develop a debit balance as a result of

the transaction.

Prior period adjustments do not appear on the income statements but in the current-year financial statements
as adjustments to the opening balance of retained earnings on the statement of retained earnings (Exhibit 106).
Most discontinued operations, extraordinary items, changes in accounting principle, and prior period
adjustments affect the amount of income taxes a corporation must pay. To report the income tax effect, FASB
Statement No. 96 requires reporting all of these items net of their tax effects, as shown in Exhibit 104 and Exhibit
106. Net-of-tax effect means that items appear at the dollar amounts remaining after deducting the income tax
45
effects. Thus, the total effect of a discontinued operation, an extraordinary item, a change in accounting principle,
or a prior period adjustment appears in one place in the appropriate financial statement. The reference to "Income
from continuing operations" on the income statement represents the results of transactions (including income

taxes) that are normal for the business and may be expected to recur. Note that the tax effect of an item may appear
separately, as it does for the gain on voluntary early retirement of debt in Exhibit 104. Or the company may
mention it parenthetically with only the net amount shown (see loss from discontinued operations and change in
accounting principle in Exhibit 104 and correction of error in Exhibit 106).
Anson Company
Statement of Retained Earnings
For the Year Ended 2010 December 31
Retained earnings, 2010 January 1 $5,000,000
Prior period adjustment:
Correction of error of expensing land (net of tax 120,000
effect of $80,000)
Retained earnings, 2010 January 1, as adjusted $5,120,000
Add: Net income 4,077,600
$9,197,600
Less: Dividends 500,000
Retained earnings, 2010 December 31 $8,687,600
Exhibit 106: Statement of retained earnings
• Income from continuing operations of USD 5,550,000 (Exhibit 104) is more representative of the

continuing earning power of the company than is the net income figure of USD 4,077,600.
• Following income, the special items from continuing operations appear at their actual impact on the
company—that is, net of their tax effect.
• EPS is reported both before (USD 5.550) and after (USD 4.078) the discontinued operations, extraordinary
item, and the cumulative effect of a change in accounting principle (Exhibit 104).

45 FASB, Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" (Stamford. Conn.,
1987). Copyright © by the Financial Accounting Standards Board, High Ridge Park, Stamford, Connecticut

06905, U.S.A.

Accounting Principles: A Business Perspective 539 A Global Text