CASE 4-9 Audit Client (2)

Each of the following situations occurred during 2011 for one of your audit clients:

1. The write-off of inventory due to obsolescence.
2. Discovery that depreciation expenses were omitted by accident from 2010’s income statement.
3. The useful lives of all machinery were changed from eight to five years.
4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method.
5. Ten million dollars face-value of bonds payable were repurchased (paid off) prior to maturity resulting in a material loss of $500,000. The company considers the event unusual and infrequent.
6. Restructuring costs were incurred.
7. The Stridewell Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered components of the entity.
8. The inventory costing method was changed from FIFO to average cost.

1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):

a. As an extraordinary item.
b. As an unusual or infrequent gain or loss.
c. As a prior period adjustment.
d. As a change in accounting principle.
e. As a discontinued operation.
f. As a change in accounting estimate.
g. As a change in accounting estimate achieved by a change in accounting principle.

2. Indicate whether each situation would be included in the income statement in continuing operations (CO) or below continuing operations (BC), or it would appear as an adjustment to retained earnings (RE). Use the format shown below to answer requirements 1 and 2.

Situation Treatment (a-g) Financial Statement Presentation (CO, BC, or RE)