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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Ethics and Sale of Operating Component

It is the end of 2019, and, as an accountant for Newell Company, you are preparing its 2019 financial statements. On December 29, 2019,

Newell’s management decided to sell one of its major divisions, subject to some legal work that is expected to be completed during the first week in April 2020 after the 2019 financial statements have been issued). During 2019, the division earned a small operating income that is just enough for the company to report “record earnings” for the year. However, the estimated fair value of the division at the end of 2019 is less than its net book value, so that management anticipates the component will be sold at a loss.

Newell’s president stops by your office and says, “You have been doing a fine job. Keep up the good work because you are heading for a promotion in early 2021. Once we report the record earnings for 2019, our shareholders and creditors will be happy. Then I think our earnings for 2020 will be high enough so that the loss we expect to report in 2020 on the sale of the division will not look so bad.” After the president leaves your office, you continue preparing the 2019 financial statements.

Required:

From financial reporting and ethical perspectives, what information, if any, will you include about the upcoming sale of the division in the 2019 financial statements?

To determine

Explain the information that would be included about the upcoming sale of the division in the 2019 financial statements.

Explanation

From the financial reporting point of view, when a company sells one of its components, the results should be reported in the discontinued operations segment during the year it is sold in the income statement. In this case, Company N should include the result from the discontinued operation section in its income statement in two elements (both net of income taxes):

 1. Income or loss from operating the discontinued operations.

2. Gain or loss that has been arrived from the sale of the component.

If the company has decided to sell any component of the business and if the sale has not been taken place during the end of the fiscal year then that can be classified under the component held for sale by satisfying the following criteria.

  • The management has organized a plan to sell the component.
  • The component is available for sale immediately in the present condition.
  • The management should organize an active program to find the buyer.
  • The sale of the component is probable in a year.
  • The sale price should be reasonable to its current fair value or book value.
  • The management is improbable to make any important change to the plan.

From the ethical point of view, the issue before the Company N is when to report the results from discontinued operations in its income statement, because the timing of the report would likely to affect the rights and fair representation of its stakeholders...

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