In 1990, Eastman Kodak recorded a third-quarter net loss of $206 million, but at the same time, it posted a 22 percent rise in operating earnings to $835 million. Much of the loss was due to a $909.5 million charge taken to cover the costs associated with a patent infringement ruling, at which time Kodak was ordered to pay almost $1 billion to Polaroid was for infringing on Polaroid’s instant photography patents. The dollar amount awarded Polaroid was far below the company’s multibillion-dollar claim. Kodak’s shares jumped $1.25 to $29.75 in response to the news.
Required
(a) Where on Kodak’s income statement should the charge be disclosed, and should the amount be reported net of tax? If so, assume a 34 percent tax rate and compute the net amount.
(b) The patent infringement case between Kodak and Polaroid was well publicized and extended over several years. How do you think this situation was reported in Kodak’s 1989 annual report? In Polaroid’s 1989 annual report?
(c) Explain why Kodak’s stock could have increased in value in response to news that the company reported a $206 million net loss for the quarter.