Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 12 Special Income and Investment Reporting Issues 561

3. Terminate a juice supply contract, activating a $120,000 cancellation penalty, payable upon
   notice of termination. The notice will be formally delivered to the supplier on August 15,
   2006.

The 280 employees earn an average of $12 per hour. The average employee works 180 hours

per month.

a. Determine the total restructuring charge.

b. Journalize the entry for the restructuring charge on July 1, 2006. (Note:Use Restructuring

Obligation as the liability account, since the charges involve more than just employee

terminations.)

c. Provide the journal entry for the October 15, 2006, employee severance payment.

d. Provide the balance sheet disclosure for December 31, 2006.

e. Provide a note disclosure for December 31, 2006.

Conway Transportation Company has suffered losses due to increased competition in its service

market from low-cost independent truckers. As a result, on December 31, 2006, the board of di-

rectors of the company approved and communicated a restructuring plan that calls for the elim-

ination of 50 driver positions and 15 staff support positions. The market price for used

tractor-trailers is depressed due to general overcapacity in the transportation industry. As a re-

sult, the market value of tractor-trailers is estimated to be only 40% of the book value of these

assets. It is not believed that the impairment in fixed assets is recoverable. The cost and accu-

mulated depreciation of the total tractor-trailer fleet on December 31 are $34 million and $9 mil-

lion, respectively. The restructuring plan will provide a severance to the drivers and staff

totaling $10,000 per employee, payable on March 14, 2007, which is the expected employee ter-

mination date.

a. Journalize the entries on December 31, 2006, for the fixed asset impairment and the em-

ployee severance costs.

b. Provide the balance sheet and note disclosure on December 31, 2006.

c. Journalize the entry for March 14, 2007.

The notes to recent financial statements of Xerox Corporationdisclosed the following tabular

information regarding restructuring charges. (Assume all restructuring charges were for em-

ployee termination benefits.)

(in millions)

Ending balance, December 31, 2003 $221

Provision (net) 85

Charges against reserve (189)

Ending balance, December 31, 2004 $117

a. What amount is shown on the December 31, 2004, balance sheet for the total estimated re-

structuring obligation?

b. Provide the journal entry for the 2004 restructuring charge.

c. Provide the journal entry for the employee termination benefit payments in 2004.

A company received life insurance proceeds on the death of its president before the end of its

fiscal year. It intends to report the amount in its income statement as an extraordinary item.

Would this reporting be in conformity with generally accepted accounting principles?

Discuss.

Exercise 12-5

Restructuring charges and
asset impairments

Goal 1

a. Severance restructuring
charge, $650,000

Exercise 12-6

Restructuring charges

Goal 1

Exercise 12-7

Extraordinary item

Goal 2