Penny Corp. manufactures telecommunication equipment and has been profitable each year for the past ten years. During 2014 the company saw its core market decline sharply when a competitor introduced a significant new product technology. In response to the decline in business Penny Corp. announced a major restructuring of its operations. The restructuring plan which would be implemented in 2010 would involve the following changes (all of the charges are material):

a.Severance payments to reduce work force$9 million

b.Write-down of inventory$13 million

c.Penalty payment for termination of lease on manufacturing facility$6 million

d.Write-down of equipment associated with manufacturing facility$12 million

Total 2010 restructuring charge$40 million

Penny Corp. has never previously restructured its operations and believes that it can return to profitability within two years based on its current research and development activity.

Required:

1.Discuss whether or not you would eliminate the restructuring charge from the 2010 income statement of Penny Corp. when using earnings to forecast future profitability.

2.Penny Corp.'s restructuring charges cover a wide range of different cost categories, identify those that entail a cash payment and those that do not require a cash payment. For those charges not requiring a cash payment how would they be treated in the Statement of Cash Flows?