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AICPA Exam CPA-Financial Topic 1 Question 99 Discussion
Topic #: 1
Kell Corp.'s $95,000 net income for the quarter ended September 30, 1990, included the following aftertax items:
* A $60,000 extraordinary gain, realized on April 30, 1990, was allocated equally to the second, third, and fourth quarters of 1990.
* A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2, 1990.
In addition, Kell paid $48,000 on February 1, 1990, for 1990 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of 1990.
For the quarter ended September 30, 1990, Kell should report net income of:
Choice 'a' is correct. $91,000 net income for the third quarter ended 9-30-90.
Rules: The entire amount of an 'extraordinary' item should be reported during the period incurred.
A 'cumulative effect' type accounting change is not included in the net income of the period of change; instead, the beginning of the year retained earnings is restated.
Expenses, which benefit more than one interim period, such as property taxes, are allocated among the periods benefited.
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