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Kellogg Company Convenience Foods Annual Report

1. (TCO 1/3) Kellogg Company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. In its annual report to shareholders, Kellogg disclosed the following:

Last year, the Company sold certain assets and liabilities of the Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Lender's business, which were not purchased by Aurora. Disposal of these other assets was completed during the current year. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximately $9 million. This amount was recorded as a credit to other income (expense), net during the current year.
Explain how the Kellogg transactions described could be interpreted as an example of earnings management.

2. (TCO 4) Briefly explain the disclosures that are required relative to depreciable assets.

3. (TCO 5) Many corporations own more than 50% of the voting stock in other corporations. Sometimes these affiliated companies operate within the same industry, and many times the companies are in unrelated industries.
What is the significance of owning more than 50% of the voting common stock of another company?

Solution Preview

1. Kellogs created an allowance of $57 million in an anticipation of loss due to disposal of assets. However, the loss actually incurred exceed this allowance Kelloggs had kept by $9 million. As a result, Kellogs reversed the loss by crediting it to other income. Hence, Kelloggs created a cookie jar reserve in the year when profits were good to record an expense and took a hit on the income. Next year, ...

Solution Summary

The expert examines Kellogg Company convenience foods annual reports.