Kell Corp.’s $95,000 net income for the quarter ended September
30, year 1, included the following after-tax items:

A $60,000 extraordinary gain, realized on April 30, year
1, was allocated equally to the second, third, and fourth
quarters of year 1.

A $16,000 cumulative-effect loss resulting from a change
in inventory valuation method was recognized on August
2, year 1.

In addition, Kell paid $48,000 on February 1, year 1, for year 1
calendar-year property taxes. Of this amount, $12,000 was allocated
to the third quarter of year 1.

For the quarter ended September 30, year 1, Kell should report
net income of

(a) Extraordinary items, gains or losses from disposal of
a segment of a business, and unusual or infrequently occurring
items should not be prorated over the balance of the fiscal year.
Thus, the $20,000 ($60,000 / 3) extraordinary gain that was
allocated to the third quarter should be subtracted from net income
as it actually occurred in the second quarter. Consistent
with the view that all accounting changes should be made effective
as of the beginning of the fiscal period, the cumulative effect
of the accounting change on retained earnings is computed at the
beginning of the fiscal year and reported in the first interim period’s
income statement. If a cumulative-effect type change is
made during an interim period subsequent to the first one, the
prior interim reports must be restated as if the changes had been
effective as of the first day of the fiscal year. Thus, the $16,000
cumulative-effect loss should not be recognized in the third quarter.
The prior interim reports should be restated and the $16,000
loss should be added back to income of the third quarter to correct
the income to be reported for the quarter. Property taxes
should be allocated among the applicable quarters. As Kell Corp.
properly allocated their property taxes, no adjustment to income
is needed. Kell should report $91,000 ($95,000 - $20,000 +
$16,000) as net income for the quarter ended September 30, year
1.