Betsy Kirkland, Inc. incurred a flood loss during the first quarter of 2011 that is deemed both unusual and infrequent. The loss is considered immaterial to the twelve-month period, but is material in amount relative to the first quarter. The proper accounting treatment in the first quarter interim statement is to:
A) Ignore the loss.
B) Record the loss in the first quarter as an extraordinary loss, net of income taxes.
C) Record one-fourth of the loss in the first quarter as an extraordinary loss, net of income taxes.
D) Ignore the loss in the first quarter, and record it in the annual statement only.
E) Record the loss in the first quarter, but not as an extraordinary loss, and disclose the loss in a separate note or in the income statement as a separate line item.

Question

Quizplus · Accepted Answer

The proper accounting treatment in this scenario is to record the loss in the first quarter, but not as an extraordinary loss. Instead, the loss should be disclosed in a separate note or as a separate line item in the income statement. This treatment is in accordance with ASC 270, Interim Reporting, which requires disclosure of any events or transactions that have a material impact on the current interim period, even if they are not material on an annual basis. The disclosure should provide sufficient information to allow users to understand the nature and impact of the event, including whether it is unusual or infrequent.