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    Business memo: Winnie Manufacturing Company

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    You have recently been hired as accounting staff at Winnie Manufacturing Company. The company is preparing its December 31, 2012 financial statements and there were a number of unusual transactions that occurred during the past year. The accounting department needs to determine the appropriate Income Statement classification for these items.

    Your supervisor, Nancy Moreno, believes that these items are all extraordinary and should be classified in the Extraordinary Item section of the Income Statement. However, she has asked you to research Extraordinary Items in the Codification to confirm the appropriate treatment. She would like you to prepare a memo (including all appropriate sections) addressed to her. The purpose of this memo is to convey your recommendation for whether each of these items should be classified as Extraordinary on the Income Statement. As part of your research, she would like you to answer the following questions and include the answers in your memo to support your recommendation.

    Be sure to include all Codification references supporting your research.

    1. What is the definition of an Extraordinary Item?

    2. What is the difference between an Extraordinary Item and Unusual or Infrequently Occurring Item?

    3. Based on the criteria in the Codification (include the reference for each item separately), explain whether each of the following transactions would be reported as an Extraordinary Item or an Unusual Item, and why.

    a. A law was passed during 2012 prohibiting the sale of one of Winnie's products. As a result of this law Winnie incurred a $500,000 loss on inventory that was already manufactured, as well as the equipment that had been used to manufacture the product.
    b. At the beginning of 2012, Winnie was primarily a manufacturer, but it had one in-house distribution unit that delivered its products in Maine. During 2012, that unit was sold to another company for a $25,000 loss. Winnie is now 100% a manufacturing company.
    c. An analysis of inventory during the year led to a $50,000 write-off of inventory that had become obsolete. Winnie had never taken a write-off for a decline in inventory value before.
    d. Winnie sustained a loss of $350,000 as a result of damage to a warehouse from an earthquake.
    e. The employees at one of Winnie's manufacturing facilities went on strike for 2 weeks in the summer, resulting in a loss of $100,000. Winnie's management has always had good relations with the unions and had never had a strike before, nor do they expect to have one again.
    f. Winnie had a parcel of land attached to one of its manufacturing facilities that it had purchased 5 years ago. It was intended to be used in the expansion of the facility, but during 2012 Winnie sustained a $75,000 loss when the state exercised its right of eminent domain and put a road on the property.
    g. Winnie has a policy of trading in its equipment at the end of its useful life and applying the value against the purchase of new equipment. However, during the year another manufacturing company offered Winnie a very good price for the sale of one of its machines, so Winnie sold the machine at a $50,000 gain. It does not expect to sell more equipment in the future.

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    Solution Preview

    From FASB Codification (quote) from 225-20-45-2:

    Extraordinary Items

    Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item:
    a. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates (see paragraph 225-20-60-3).
    b. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates (see paragraph 225-20-60-3).
    Examples that meet or do not meet from 225-20-45-4, 225-20-55-3 and 225-20-55-4:
    45-4 Certain gains and losses shall not be reported as extraordinary items (except as indicated in the following paragraph) because they are usual in nature or may be expected to recur as a consequence of customary and continuing business activities. Examples include all of the following:
    a. Write-down or write-off of receivables, inventories, equipment leased to others, deferred research and development costs, or other intangible assets
    b. Gains or losses from exchange or translation of foreign currencies, including those relating to major devaluations and revaluations
    c. Gains or losses on disposal of a component of an entity
    d. Other gains or losses from sale or abandonment of property, plant, or equipment used in the business
    e. Effects of a strike, including those against competitors and major suppliers
    f. Adjustment of accruals on long-term contracts.

    > > Events or Transactions Meeting Extraordinary Item Criteria
    55-3 The following are illustrative of events or transactions which would meet both criteria in the circumstances described and should be reported as extraordinary items:
    a. A large portion of a tobacco manufacturer's crops are destroyed by a hail storm. Severe damage from hail storms in the locality where the manufacturer grows tobacco is rare.
    b. A steel fabricating entity sells the only land it owns. The land was acquired 10 years ago for future expansion, but shortly thereafter the ...

    Solution Summary

    Your tutorial includes codification references (cut and pasted in full) to give you the theory and all the examples given in the literature. Most of the business events are specifically mentioned in the ASC and so the references to find the matching story is given.