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Chapter 4: 5Q (page 179)

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

Short Answer

Expert verified

The transaction approach provides information regarding those activities that have occurred during a particular period. This approach is preferable because it includes a detailed explanation of the components.

Step by step solution

01

Meaning of Revenues

Revenue refers to the amount of money received from the business's general operations. Costs are deducted from the revenues to get the net income.

02

Explanation of transaction approach

The transaction approach includes the major components of the income statement like revenues, gains, expenses, and loss transactions. The other alternative to measuring income is the capital maintenance approach that includes only the changes in net income but not the essential elements like revenues and expenses of the income statement. Hence,the transaction approach is preferable to any other way to measure income.

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Most popular questions from this chapter

Wade Corp. has 150,000 shares of common stock outstanding. In 2017, the company reports income from continuing operations before income tax of \(1,210,000. Additional transactions not considered in the \)1,210,000 are as follows.

1. In 2017, Wade Corp. sold equipment for \(40,000. The machine had originally cost \)80,000 and had accumulated depreciation of \(30,000. The gain or loss is considered non-recurring.

2. The company discontinued operations of one of its subsidiaries during the current year at a loss of \)190,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was \(90,000 before taxes; the loss from disposal of the subsidiary was \)100,000 before taxes.

3. An internal audit discovered that amortization of intangible assets was understated by \(35,000 (net of tax) in a prior period. The amount was charged against retained earnings.

4. The company recorded a non-recurring gain of \)125,000 on the condemnation of some of its property (included in the $1,210,000).

Instructions

Analyze the above information and prepare an income statement for the year 2017, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)

Vandross Company has recorded bad debt expense in the past at a rate of 1½% of accounts receivable, based on an aging analysis. In 2017, Vandross decided to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been \(380,000 instead of \)285,000. In 2017, bad debt expense will be \(120,000 instead of \)90,000. If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

(Single-Step Statement, Retained Earnings Statement, Periodic Inventory) Presented below is the trial balance of Thompson Corporation on December 31, 2017.

THOMPSON CORPORATION
TRIAL BALANCE

DECEMBER 31, 2017

Debit (\()

Credit (\))

Purchase Discounts

\(10,000

Cash

\)189,700

Accounts receivables

105,000

Rent Revenue

18,000

Retained Earnings

160,000

Salaries and Wages payable

18,000

Sales Revenue

1,100,000

Notes Receivables

110,000

Accounts payable

49,000

Accumulated Depreciation

28,000

Sales discount

14,500

Sales return and allowances

17,500

Notes payable

70,000

Selling expenses

232,000

Administrative expenses

99,000

Common Stock

300,000

Income tax expenses

53,900

Cash Dividends

45,000

Allowance for Doubtful Accounts

5,000

Supplies

14,000

Freight-In

20,000

Land

70,000

Equipment

140,000

Bonds Payable

100,000

Gain on Sale of Land

30,000

Accumulated Depreciation

19,600

Inventory

89,000

Buildings

98,000

Purchases

610,000

Totals

\(1,907,600

\)1,907,600

A physical count of inventory on December 31 resulted in an inventory amount of \(64,000; thus, cost of goods sold for 2017 is \)645,000.

Instructions

Prepare a single-step income statement and a retained earnings statement. Assume that the only changes in retained earnings during the current year were from net income and dividends. Thirty thousand shares of common stock were outstanding the entire year.

Discuss the appropriate treatment in the income statement for the following items:

(a) Loss on discontinued operations.

(b) Non-controlling interest allocation.

(c) Earnings per share.

(d) Gain on sale of equipment.

Question: O’Malley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O’Malley Corporation provides you with the following income statement which O’Malley plans to submit to the bank.

O’MALLEY CORPORATION

INCOME STATEMENT

Sales revenue \(850,000

Dividends 32,300

Gain on recovery of insurance proceeds from

earthquake loss 38,500

920,800

Less:

Selling expenses \)101,100

Cost of goods sold 510,000

Advertising expense 13,700

Loss on obsolescence of inventories 34,000

Loss on discontinued operations 48,600

Administrative expense 73,400 780,800

Income before income tax 140,000

Income tax 56,000

Net income $84,000

Instructions

Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.
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