B is corrent. Net income as reported ($74,100) properly included the gain on early retirement of bonds payable ($33,000) and the loss from fire ($14,000). The fact that the loss was reported net of taxes in the income statement was incorrect, but does not cause the net income amount to be in error. However, the other two items should not be reported in the income statement. If Thorpe does not elect the fair value option, the rules of ASC Topic 320 apply. Therefore, an unrealized loss on available-for-sale investments in stock ($5,400) is reported in "other comprehensive income," net of tax under one of three acceptable alternatives and as part of "accumulated other comprehensive income" in the stockholders’ equity section. A correction of an error ($7,500) is treated as a prior period adjustment. It is reported in the financial statements as an adjustment to the beginning balance of retained earnings, rather than in the income statement. Since both of these items were subtracted in the computation of reported net income, they must be added back to compute the correct net income of $87,000 ($74,100 + $5,400 + $7,500).
A is incorrect. Net income as reported ($74,100) properly included the gain on early retirement of bonds payable ($33,000) and the loss from fire ($14,000). The fact that the loss was reported net of taxes in the income statement was incorrect, but does not cause the net income amount to be in error. However, the other two items should not be reported in the income statement. If Thorpe does not elect the fair value option, the rules of ASC Topic 320 apply. Therefore, an unrealized loss on available-for-sale investments in stock ($5,400) is reported in "other comprehensive income," net of tax under one of three acceptable alternatives and as part of "accumulated other comprehensive income" in the stockholders’ equity section. A correction of an error ($7,500) is treated as a prior period adjustment. It is reported in the financial statements as an adjustment to the beginning balance of retained earnings, rather than in the income statement. Since both of these items were subtracted in the computation of reported net income, they must be added back to compute the correct net income of $87,000 ($74,100 + $5,400 + $7,500).
C is incorrect. Net income as reported ($74,100) properly included the gain on early retirement of bonds payable ($33,000) and the loss from fire ($14,000). The fact that the loss was reported net of taxes in the income statement was incorrect, but does not cause the net income amount to be in error. However, the other two items should not be reported in the income statement. If Thorpe does not elect the fair value option, the rules of ASC Topic 320 apply. Therefore, an unrealized loss on available-for-sale investments in stock ($5,400) is reported in "other comprehensive income," net of tax under one of three acceptable alternatives and as part of "accumulated other comprehensive income" in the stockholders’ equity section. A correction of an error ($7,500) is treated as a prior period adjustment. It is reported in the financial statements as an adjustment to the beginning balance of retained earnings, rather than in the income statement. Since both of these items were subtracted in the computation of reported net income, they must be added back to compute the correct net income of $87,000 ($74,100 + $5,400 + $7,500).
D is incorrect. Net income as reported ($74,100) properly included the gain on early retirement of bonds payable ($33,000) and the loss from fire ($14,000). The fact that the loss was reported net of taxes in the income statement was incorrect, but does not cause the net income amount to be in error. However, the other two items should not be reported in the income statement. If Thorpe does not elect the fair value option, the rules of ASC Topic 320 apply. Therefore, an unrealized loss on available-for-sale investments in stock ($5,400) is reported in "other comprehensive income," net of tax under one of three acceptable alternatives and as part of "accumulated other comprehensive income" in the stockholders’ equity section. A correction of an error ($7,500) is treated as a prior period adjustment. It is reported in the financial statements as an adjustment to the beginning balance of retained earnings, rather than in the income statement. Since both of these items were subtracted in the computation of reported net income, they must be added back to compute the correct net income of $87,000 ($74,100 + $5,400 + $7,500).
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