Kellogg Company and Its Subsidiaries Are Engaged in the Manufacture

question 22

Essay

Kellogg Company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. In its annual report to shareholders, Kellogg disclosed the following:
DISPOSITIONS
Last year, the Company sold certain assets and liabilities of the Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Lender's business, which were not purchased by Aurora. Disposal of these other assets was completed during the current year. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximately $9 million. This amount was recorded as a credit to other income (expense), net during the current year.
Required:
Explain how the Kellogg transactions described could be interpreted as an example of earnings management.

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Definitions:

Heimlich Maneuver

A first aid procedure used to treat upper airway obstructions (or choking) by foreign objects.

Airway Obstruction

A blockage in any part of the airway, which can lead to difficulty breathing and is considered a medical emergency.

Cystic Fibrosis

A genetic disorder that affects the lungs and other organs, characterized by thick, sticky mucus that can clog airways and harbor bacterial infections.

Nourishment

The food or other substances necessary for growth, health, and good condition.