Financial Accounting: An Integrated Statements Approach, 2nd Edition

For the year ended December 31, 2002, Delta Air Lines, Inc., provided the following note to its

financial statements:

On September 22, 2001, the Air Transportation Safety and System Stabilization Act (Stabi-

lization Act) became effective. The Stabilization Act is intended to preserve the viability of the

U.S. air transportation system following the terrorist attacks on September 11, 2001 by, among

other things, (1) providing for payments from the U.S. Government totaling $5 billion to com-

pensate U.S. air carriers for losses incurred from September 11, 2001, through December 31,

2001, as a result of the September 11 terrorist attacks and (2) permitting the Secretary of Trans-

portation to sell insurance to U.S. air carriers.

Our allocated portion of compensation under the Stabilization Act was $668 million. Due

to uncertainties regarding the U.S. government’s calculation of compensation, we recognized

$634 million of this amount in our 2001 Consolidated Statement of Operations. We recognized

the remaining $34 million of compensation in our 2002 Consolidated Statement of Operations.

We received $112 million and $556 million in cash for the years ended December 31, 2002 and

2001, respectively, under the Stabilization Act.

Do you believe that the income related to the Stabilization Act should be reported as an extra-

ordinary item on the income statement of Delta Air Lines?

Assume that the amount of each of the following items is material to the financial statements.

Classify each item as either normally recurring (NR) or extraordinary (E).

a. Interest revenue on notes receivable.

b. Uninsured flood loss. (Flood insurance is unavailable because of periodic flooding in the

area.)

c. Loss on sale of fixed assets.

d. Restructuring charge related to employee termination benefits.

e. Gain on sale of land condemned for public use.

f. Uncollectible accounts expense.

g. Uninsured loss on building due to hurricane damage. The firm was organized in 1920

and had not previously incurred hurricane damage.

h. Loss on disposal of equipment considered to be obsolete because of development of new

technology.

Wave Runner, Inc., produces and distributes equipment for sailboats. On the basis of the fol-

lowing data for the current fiscal year ended June 30, 2006, prepare a multiple-step income state-

ment for Wave Runner, including an analysis of earnings per share in the form illustrated in this

chapter. There were 10,000 shares of $150 par common stock outstanding throughout the year.

Administrative expenses $ 92,400

Cost of merchandise sold 431,900

Cumulative effect on prior years of changing to a different

depreciation method (decrease in income) 60,000

Gain on condemnation of land (extraordinary item) 43,000

Income tax reduction applicable to change in depreciation method 24,000

Income tax applicable to gain on condemnation of land 17,200

Income tax reduction applicable to loss from discontinued operations 36,000

Income tax applicable to ordinary income 58,800

Loss on discontinued operations 90,000

Loss from fixed asset impairment 100,000

Restructuring charge 80,000

Sales 976,400

Selling expenses 125,100

562 Chapter 12 Special Income and Investment Reporting Issues

Exercise 12-8

Extraordinary item

Goal 1

Exercise 12-9

Identifying extraordinary items

Goal 1

Exercise 12-10

Income statement

Goals1, 2

Net income, $24,000