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Mrs. Mary

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McMinville Corporation manufactures paper products. In 2007, the company purchased several large tracts of timber for $22 million with the intention of harvesting the timber rather than buying this critical raw material from outside suppliers. However, in 2011, McMinville abandoned the idea and all of the timber tracts were sold for $31 million. Net income for 2011, before considering this event, is $17.5 million and the company's effective tax rate is 30%.

The focus of this case is the income statement presentation of the gain on the sale of the timber tracts. Deliberate the situation independently and share the solution with the class. The goal of the class is to incorporate the views of each classmate into a consensus approach to the situation.

How can you really make that determination without additional information and the financial statements for the years 2007 through 2010?  How the sale is treated is dependent on how the asset purchase recorded, whether it was used as intended and how the asset was carried on the financials throughout the life of the asset. 

The information states the intent was to harvest the timber instead of buying timber so I am going to assume that happened.  Another assumption must be made here as well, and that is there was a separate division or operating entity set up to manage the asset; to account for the revenue and expense associated with harvesting the timber and supplying it to the paper mill(s) as a raw material at fair market value, with additional revenues for sale of excess production to other paper mills and sale of incidental products such as bark, wood chips or mulch.  With these assumptions, the decision to abandon the operation would be a discontinuation of operations and would be reported as a discontinued operation on the income statement.  The profit or loss the operation from the beginning of the fiscal period would be reported after the income from continued operations, net of taxes and the profit of the sale would be reported as the disposal of the asset of the discontinued operation, net of taxes (Nobles, Mattison, & Matsumura, 2014):

Income from continuing operations before income tax		22.75
Income tax		5.25
Income from continuing operations
Discontinued operations
Profit or loss on discontinued operations	???????
Less tax reduction	???????	?????????
Disposal of discontinued operations	33
Less tax reduction	9.9	23.1

 

If the asset was not used during this time, it may have been classified as a long term investment and the sale would appear in the “Other revenue and gains” subsection of the income from continuing operations section of the income statement (Nobles, Mattison, & Matsumura, 2014).

Works Cited

Nobles, T., Mattison, B., & Matsumura, E. M. (2014). Horngren's Financial and Managerial Accounting The Financial Chapters. Upper Saddle River, New Jersey: Pearson.

 

 

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RE: Discussion 3

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Mary,

I really enjoyed your perspective. I think you supported your decision to report the sale as a discontinued operation. When I considered the discontinued operation path I was having trouble thinking of revenues that may have been generated. I like how you identified the extra mulch, bark, and wood chips as possible revenue - very creative!

I do not think there is necessarily a right or wrong answer to this weeks discussion. Like you said, we all need to make a variety of assumptions to arrive at a solution. The important thing is we take the time to support our answer and you did a great job with that.

- Sean

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