A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of income:

The question describes an "extraordinary item" using its historical U.S. GAAP definition: a transaction that is both unusual in nature and infrequent in occurrence. Although the FASB eliminated the concept of extraordinary items in ASU 2015-01, this question tests the historical presentation rules. Under those superseded rules, extraordinary items were presented separately on the income statement, net of their tax effects. The correct placement was immediately following the results of discontinued operations. Therefore, the item would be reported after discontinued operations. Under current GAAP, such an item would be a component of income from continuing operations.

A. This is incorrect. Under the historical standard, extraordinary items were reported after, not before, discontinued operations.
B. This is incorrect. While reported after discontinued operations, extraordinary items were presented before the cumulative effect of accounting changes under the historical standards.
C. This is incorrect. The placement was after discontinued operations and before the cumulative effect of accounting changes under the historical standard.

1. Financial Accounting Standards Board (FASB). (January 2015). Accounting Standards Update (ASU) No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The summary section of this ASU explicitly states it "eliminates from U.S. GAAP the concept of extraordinary items," confirming the concept is historical.

2. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2014). Intermediate Accounting (15th ed.). Wiley. In Chapter 4, "Income Statement and Related Information," this pre-update textbook illustrates the multi-step income statement. The section on "Extraordinary Items" (pp. 169-171) shows their placement after discontinued operations.

3. FASB Accounting Standards Codification (ASC) 225-20-45-1 (Superseded). The superseded guidance in this section of the codification specified the presentation order on the income statement, requiring extraordinary items to be placed after the section for discontinued operations.