Simpson Corp. is an entertainment firm that derivesapproximately 30% of its income from the Casino Knights Division,which manages gambling facilities. As auditor for Simpson Corp.,you have recently overheard the following discussion between thecontroller and financial vice president.
Vice President: If we sell the Casino Knights Division, it seems ridiculous tosegregate the results of the sale in the income statement. Separatecategories tend to be absurd and confusing to the stockholders. Ibelieve that we should simply report the gain on the sale as otherincome or expense without detail. Controller: Professional pronouncements would require that we report thisinformation separately in the income statement. If a sale of thistype is considered unusual and infrequent, it must be reported asan extraordinary item. Vice President: What about the walkout we had last month when employees wereupset about their commission income? Would this situation not alsobe an extraordinary item? Controller: I am not sure whether this item would be reported asextraordinary or not. Vice President:
Oh well, it doesnât make any difference because the net effectof all these items is immaterial, so no disclosure isnecessary.
On the basis of the foregoing discussion, answer the followingquestions. Who is correct about handling the sale? What would bethe correct income statement presentation for the sale of theCasino Knights Division?
How should the walkout by the employees be reported?
What do you think about the vice presidentâs observation onmateriality?
What are the earnings per share implications of thesetopics?
Simpson Corp. is an entertainment firm that derivesapproximately 30% of its income from the Casino Knights Division,which manages gambling facilities. As auditor for Simpson Corp.,you have recently overheard the following discussion between thecontroller and financial vice president.
| Vice President: | If we sell the Casino Knights Division, it seems ridiculous tosegregate the results of the sale in the income statement. Separatecategories tend to be absurd and confusing to the stockholders. Ibelieve that we should simply report the gain on the sale as otherincome or expense without detail. | |
| Controller: | Professional pronouncements would require that we report thisinformation separately in the income statement. If a sale of thistype is considered unusual and infrequent, it must be reported asan extraordinary item. | |
| Vice President: | What about the walkout we had last month when employees wereupset about their commission income? Would this situation not alsobe an extraordinary item? | |
| Controller: | I am not sure whether this item would be reported asextraordinary or not. | |
Vice President: | Oh well, it doesnât make any difference because the net effectof all these items is immaterial, so no disclosure isnecessary. On the basis of the foregoing discussion, answer the followingquestions. Who is correct about handling the sale? What would bethe correct income statement presentation for the sale of theCasino Knights Division? How should the walkout by the employees be reported? What do you think about the vice presidentâs observation onmateriality? What are the earnings per share implications of thesetopics? |
