Chapter 12, Problem 1STQ

To determine

Find the correct option, the option that explains the reason for reporting the irregular items separately in the income statement.

Answer to Problem 1STQ

The correct answer is option (b).

Explanation of Solution

Unusual or infrequent items: These are nonrecurring transactions that either do not repeat frequently, or unusual in nature, and hence, are reported separately from the results of business operations. Gains or losses from sale of plant assets, impairment losses, write-down value of plant assets, and losses from labor strikes are some common examples.

Justification for correct answer: The gains or losses from unusual or infrequent items increase or decrease the net income temporarily. This temporary changes might be used by investors to predict future earnings. So, companies report the gains or losses from unusual or infrequent items separately on the income statement, to avoid the incorrect forecast or wrong interpretation of future earnings from ongoing operations by the users. So, option (b) is correct answer.

Justification for incorrect answers:

• Option (a) is incorrect answer because earnings per share is reported for income from continuing operations and discontinued operations separately. So, either gains or losses from the irregular items would not affect the earnings per share.
• Option (c) is incorrect answer because the unusual or infrequent items are not reported on a net-of-tax but the income tax effect of these items is reported along with the income tax expense of recurring items.
• Option (d) is incorrect answer because unusual losses are generally infrequent and cannot be predicted to prevent them.

Conclusion

Hence, option (b) is the correct answer.