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:

Assignment

The transfer of rights under a contract to another party.

Negotiation

Direct communication between the parties to a dispute in an effort to resolve the problems without third-party intervention; transferring negotiable instruments to third parties.

Negotiable Instrument

A legal document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payee able to transfer it to another holder.

Endorsement

A signature or stamp on a document or instrument that signifies approval, support, or transfer of rights.