Case 1

Question 1A-ES01

It is almost midnight on December 31, 20XX, and the bookkeeping program at Crank-M-Up, Inc. is malfunctioning. Instead of producing an income statement, it keeps printing an alphabetical list of accounts:

Administrative expenses $215,000

Cost of goods sold 408,500

Extraordinary casualty loss 70,000

Income taxes 54,900

Loss on inventory write-down (nonrecurring) 13,000

Gain on foreign currency translation 19,500

Loss from discontinued operations 30,000

Sales 945,000

Selling expenses 145,000

*The practice essay questions for Section A are original questions and are not released ICMA questions.

Questions

1. As the new accountant for Crank-M-Up, your first job is to prepare the firms multiple-step income statement for 20XX with EPS disclosures in accordance with G.A.A.P. Crank-M-Up has 50,000 shares of common stock outstanding and has a 30% federal income tax rate.
2. Mark M. Down, the CEO of Crank-M-Up, is confused about the accounting treatment for irregular items on the income statement and wants you to explain: (1) Why GAAP requires special treatment for irregular items; (2) How to determine whether an item is unusual or extraordinary.