Question:
The following events occurred during 2013 for various audit clients of your firm. Consider each event to
be independent and the effect of each event to be material.
1. A manufacturing company recognized a loss on the sale of investments.
2. An automobile manufacturer sold all of the assets related to its financing component. The operations of
the financing business is considered a component of the entity.
3. A company changed its depreciation method from the double-declining-balance method to the straight-
line method.
4. Due to obsolescence, a company engaged in the manufacture of high-technology products incurred a
loss on the write-down of inventory.
5. One of your clients discovered that 2012’s depreciation expense was overstated. The error occurred
because of a miscalculation of depreciation for the office building.
6. A cosmetics company decided to discontinue the manufacture of a line of women’s lipstick. Other
cosmetic lines will be continued. A loss was incurred on the sale of assets related to the lipstick product
line. The operations of the discontinued line is not considered a component of the entity.
Required:
Discuss the 2013 financial statement presentation of each of the above events. Do not consider earnings
per sharedisclosures.
Answer:
1. The loss is not unusual or infrequent. It is included in income from continuing operations along with
other nonoperating items.
2. The sale of the financing component is treated as a discontinued operation. The gain or loss from the
sale of the assets along with income or loss generated by the component is presented below income
from continuing operations.
The following events occurred during 2013 for various audit clients of your firm. Consider each event to
be independent and the effect of each event to be material.
1. A manufacturing company recognized a loss on the sale of investments.
2. An automobile manufacturer sold all of the assets related to its financing component. The operations of
the financing business is considered a component of the entity.
3. A company changed its depreciation method from the double-declining-balance method to the straight-
line method.
4. Due to obsolescence, a company engaged in the manufacture of high-technology products incurred a
loss on the write-down of inventory.
5. One of your clients discovered that 2012’s depreciation expense was overstated. The error occurred
because of a miscalculation of depreciation for the office building.
6. A cosmetics company decided to discontinue the manufacture of a line of women’s lipstick. Other
cosmetic lines will be continued. A loss was incurred on the sale of assets related to the lipstick product
line. The operations of the discontinued line is not considered a component of the entity.
Required:
Discuss the 2013 financial statement presentation of each of the above events. Do not consider earnings
per sharedisclosures.
Answer:
1. The loss is not unusual or infrequent. It is included in income from continuing operations along with
other nonoperating items.
2. The sale of the financing component is treated as a discontinued operation. The gain or loss from the
sale of the assets along with income or loss generated by the component is presented below income
from continuing operations.
