Financial Accounting Income Statement Presentation Homework Help
- September 13, 2017
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- Category: Accounting QA
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1.P had pretax income from continuing operations of $16208 during 2014. During 2014 P disposed of a division that qualified as a component of an entity at a pretax gain (loss) of $948. The division had an operating gain (loss) of $-205 prior to the sale in 2014. Assume a tax rate of 15%. Calculate
a. Net income (loss) from continuing operations
b. Net income (loss) from discontinued operations
c. Net income (loss)
2.For the year ended December 31, 2014. Assume a tax rate of 32%.
• Sales revenue: $10374
• Cost of goods sold: $7662
• Administrative expenses: $659
• Interest expense: $560
• Loss from earthquake damage (unusual and infrequent event): $1356
• Restructuring costs: $632
• Understatement of depreciation expense in 2013 caused by mathematical error: $1087
Calculate
a. Net income (loss) from continuing operations
b. Net income (loss) from discontinued operations
c. Net income (loss) from extraordinary items
d. Net income (loss)
3.Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president.
Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.
Controller: Professional pronouncements would require that we disclose this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported as an extraordinary item.
Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be an extraordinary item?
Controller: I am not sure whether this item would be reported as extraordinary or not.
Vice President: Oh well, it doesn’t make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.
Instructions
(a) On the basis of the foregoing discussion, answer the following questions: Who is correct about handling the sale? What would be the correct income statement presentation for the sale of the Casino Knights Division?
(b) How should the walkout by the employees be reported?
(c) What do you think about the vice president’s observation on materiality?
(d) What are the earnings per share implications of these topics?
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4. Income statement presentation
Each of the following situations occurred during 2011 for one of your audit clients
1. The write-off of inventory due to obsolescence.
2. Discovery that depreciation expenses were omitted by accident from 2010’s income statement.
3. The useful lives of all machinery were changed from eight to five years.
4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method.
5. Ten million dollars face value of bonds payable were repurchased (paid off) prior to maturity resulting in a material loss of $500,000. The company considers the event unusual and infrequent.
6. Restructuring costs were incurred.
7. The Stridewell Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered components of the entity.
8. The inventory costing method was changed from FIFO to average cost.
Required
1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):
a. As an extraordinary item.
b. As an unusual or infrequent gain or loss.
c. As a prior period adjustment.
d. As a change in accounting principle.
e. As a discontinued operation.
f. As a change in accounting estimate.
g. As a change in accounting estimate achieved by a change in accounting principle.
2. Indicate whether each situation would be included in the income statement in continuing operations (CO) or below continuing operations (BC), or if it would appear as an adjustment to retained earnings (RE). Use the format shown below to answer requirements 1 and 2.
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