Derek Lee, vice president of finance for Atlanta Company, has recently been asked to discuss with the company’s division controllers the proper accounting for extraordinary items. Derek Lee prepared the factual situations presented below as a basis for discussion.
1. An earthquake destroys one of the oil refineries owned by a large multinational oil company. Earthquakes are rare in this geographical location.
2. A publicly held company has incurred a substantial loss in the unsuccessful registration of a bond issue.
3. A large portion of a cigarette manufacturer’s tobacco crops are destroyed by a hailstorm. Severe damage from hailstorms is rare in this locality.
4. A large diversified company sells a block of shares from its portfolio of securities acquired for investment purposes.
5. A company that operates a chain of warehouses sells the excess land surrounding one of its warehouses. When the company buys property to establish a new warehouse, it usually buys more land than it expects to use for the warehouse with the expectation that the land will appreciate in value. Twice during the past 5 years the company sold excess land.
6. A company experiences a material loss in the repurchase of a large bond issue that has been outstanding for 3 years. The company regularly repurchases bonds of this nature.
7. A railroad experiences an unusual flood loss to part of its track system. Flood losses normally occur every 3 or 4 years.
8. A machine tool company sells the only land it owns. The land was acquired 10 years ago for future expansion, but shortly thereafter the company abandoned all plans for expansion but decided to hold the land for appreciation.
Instructions
Determine whether the foregoing items should be classified as extraordinary items. Present a rationale for your position.