Penny Corp.manufactures telecommunication equipment and has been profitable each year for the past ten years.During 2014 the company saw its core market decline sharply when a competitor introduced a significant new product technology.In response to the decline in business Penny Corp.announced a major restructuring of its operations.The restructuring plan which would be implemented in 2010 would involve the following changes (all of the charges are material):
$$\begin{array} { l l l }
\text { a. } & \text { Severance payments to reduce work force } & \$ 9 \text { million } \
\text { b. } & \text { Write-down of inventory } & \$ 13 \text { million } \
\text { c. } & \text { Penalty payment for termination of lease on manufacturing facility } & \$ 6 \text { million } \
\text { d. } & \text { Write-down of equipment associated with manufacturing facility } & \frac { \$ 12 \text { million } } { \$ 40 \text { million } }
\end{array}$$
Penny Corp.has never previously restructured its operations and believes that it can return to profitability within two years based on its current research and development activity.
Required:
1.Discuss whether or not you would eliminate the restructuring charge from the 2010 income statement of Penny Corp.when using earnings to forecast future profitability.
2.Penny Corp.'s restructuring charges cover a wide range of different cost categories; identify those that entail a cash payment and those that do not require a cash payment.For those charges not requiring a cash payment how would they be treated in the Statement of Cash Flows?

Question

Penny Corp.manufactures telecommunication equipment and has been profitable each year for the past ten years.During 2014 the company saw its core market decline sharply when a competitor introduced a significant new product technology.In response to the decline in business Penny Corp.announced a major restructuring of its operations.The restructuring plan which would be implemented in 2010 would involve the following changes (all of the charges are material):
 $$\begin{array} { l l l } 
\text { a. } & \text { Severance payments to reduce work force } & \$ 9 \text { million } \
\text { b. } & \text { Write-down of inventory } & \$ 13 \text { million } \
\text { c. } & \text { Penalty payment for termination of lease on manufacturing facility } & \$ 6 \text { million } \
\text { d. } & \text { Write-down of equipment associated with manufacturing facility } & \frac { \$ 12 \text { million } } { \$ 40 \text { million } }
\end{array}$$ 
Penny Corp.has never previously restructured its operations and believes that it can return to profitability within two years based on its current research and development activity.
Required:
1.Discuss whether or not you would eliminate the restructuring charge from the 2010 income statement of Penny Corp.when using earnings to forecast future profitability.
2.Penny Corp.'s restructuring charges cover a wide range of different cost categories; identify those that entail a cash payment and those that do not require a cash payment.For those charges not requiring a cash payment how would they be treated in the Statement of Cash Flows?

Quizplus · Accepted Answer

The Answer of Penny Corp.manufactures telecommunication equipment and has been profitable each year for the past ten years.During 2014 the company saw its core market decline sharply when a competitor introduced a significant new product technology.In response to the decline in business Penny Corp.announced a major restructuring of its operations.The restructuring plan which would be implemented in 2010 would involve the following changes (all of the charges are material):
 $$\begin{array} { l l l } 
\text { a. } & \text { Severance payments to reduce work force } & \$ 9 \text { million } \
\text { b. } & \text { Write-down of inventory } & \$ 13 \text { million } \
\text { c. } & \text { Penalty payment for termination of lease on manufacturing facility } & \$ 6 \text { million } \
\text { d. } & \text { Write-down of equipment associated with manufacturing facility } & \frac { \$ 12 \text { million } } { \$ 40 \text { million } }
\end{array}$$ 
Penny Corp.has never previously restructured its operations and believes that it can return to profitability within two years based on its current research and development activity.
Required:
1.Discuss whether or not you would eliminate the restructuring charge from the 2010 income statement of Penny Corp.when using earnings to forecast future profitability.
2.Penny Corp.'s restructuring charges cover a wide range of different cost categories; identify those that entail a cash payment and those that do not require a cash payment.For those charges not requiring a cash payment how would they be treated in the Statement of Cash Flows?

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