Multiple Choice Question 152: Meche Company Reports Income B

Multiple Choice Question 152meche Company Reports Income Before Income

Multiple Choice Question 152 MECHE Company reports income before income taxes of $2,500,000 and had an extraordinary loss of $800,000. If the tax rate is 35%, which of the following is correct: the income before the extraordinary item, the reporting of the extraordinary loss, or the amount reported on the income statement related to the extraordinary loss? Please select the accurate statement based on accounting standards for extraordinary items and after-tax calculations.

Paper For Above instruction

In analyzing MECHE Company's financial statements, particularly its treatment of income before taxes and extraordinary losses, it is essential to understand the interplay between pre-tax income, extraordinary items, and tax effects in accordance with generally accepted accounting principles (GAAP). The company's reported income before income taxes is $2,500,000, with an extraordinary loss of $800,000, and a tax rate of 35%. This scenario requires determining the correct net income figure after adjusting for the extraordinary loss and its tax implications, as well as understanding how such losses are presented in financial reports.

First, it is important to recognize that extraordinary items—unusual and infrequent losses or gains—are reported separately, net of tax, on the income statement. Under GAAP, the treatment of extraordinary items includes calculating their after-tax impact, which affects the net income figure. Thus, the immediate step involves calculating the after-tax value of the extraordinary loss:

\[

\text{After-tax extraordinary loss} = \text{Extraordinary loss} \times (1 - \text{Tax rate}) = 800,000 \times (1 - 0.35) = 800,000 \times 0.65 = 520,000

\]

This amount represents the net effect on net income from the extraordinary loss after accounting for taxes. The gross loss of $800,000 appears on the income statement, but the net after-tax effect is $520,000.

Next, we determine the adjusted net income after considering the extraordinary loss:

\[

\text{Income before taxes} = \$2,500,000

\]

\[

\text{Net income after extraordinary loss} = \text{Income before taxes} - \text{after-tax extraordinary loss} = 2,500,000 - 520,000 = 1,980,000

\]

This net income figure represents MECHE's income after considering both the pre-tax income and the after-tax impact of the extraordinary loss.

Now, examining the provided options:

1. "The income before the extraordinary item is $1,625,000."

- To determine the income before the extraordinary item, subtract the extraordinary loss net of taxes from the pre-tax income:

\[

\text{Income before extraordinary item} = \$2,500,000 - (\text{extraordinary loss} \times (1 - 0.35)) = \$2,500,000 - 520,000 = 1,980,000

\]

- Since this does not match $1,625,000, option one appears incorrect.

2. "The extraordinary loss will be reported at $280,000."

- The actual extraordinary loss is $800,000. The reported amount on the income statement for the extraordinary loss is gross, unless explicitly presented net of taxes, which is uncommon. Therefore, this statement does not align with standard presentation and seems incorrect.

3. "The income before the extraordinary item is $1,190,000."

- Using the calculation as above, it is not consistent; thus, this option is unlikely.

4. "The extraordinary loss would be reported on the income statement at $800,000."

- This is consistent with accounting standards, as extraordinary losses are typically reported gross of tax, reflecting the total loss before considering their tax impact.

Considering the above analyses, the most accurate statement conforms to standard accounting practices: the extraordinary loss is reported at its gross amount of $800,000 on the income statement.

Conclusion:

The correct answer is that the extraordinary loss will be reported on the income statement at $800,000, aligning with standard disclosure practices.

References

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  • Financial Accounting Standards Board (FASB). (2016). Accounting Standards Codification (ASC) Topic 225: Income Statement. FASB.
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  • Hossain, M., & Ng, M. (2019). Report of Extraordinary Items in Financial Statements. Accounting Horizons, 33(4), 123-138.

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