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Chapter 4: Q4-3CA (page 190)

Charlie Brown, the controller for Kelly Corporation, is preparing the company’s income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s expenses, where he hopes it will not be noticed.

Instructions

  1. What are the ethical issues involved?
  2. What should Brown do?

Short Answer

Expert verified

In the given case, Brown is raising the expenses of the company to hide the material loss associated with the company’s activities.

Step by step solution

01

Meaning of Ethics

In accounting, ethics refers to the adherence to applicable rules, guidelines, and principles associated with accounting activities. Such ethics are issued by governing bodies to prevent the misuse of financial information.

02

Involvement of ethical issues

According to the situation mentioned above, the practice adopted by Brown is unethical because he is not following the full disclosure principle of accounting.

In addition, Brown is hiding material information from the external users of financial information and making manipulations in thebooks of accounts.

03

Responsibility of Mr. Brown

In the given situation, Mr. Charlie Brown should follow the accounting principles and accurately disclose the information associated with material loss.

In addition, Brown must disclose the loss in unusual items rather than increasing the depreciation expenses in the operating activities section of the income statement.

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Most popular questions from this chapter

The following are selected ledger accounts of Spock Corporation on December 31, 2017.

Cash \( 185,000 Salaries and wages expense (sales) \)284,000

Inventory 535,000 Salaries and wages expense (office) 346,000

Sales revenue 4,275,000 Purchase returns 15,000

Unearned sales revenue 117,000 Sales returns and allowances 79,000

Purchases 2,786,000 Freight-in 72,000

Sales discounts 34,000 Accounts receivable 142,500

Purchase discounts 27,000 Sales commissions 83,000

Selling expenses 69,000 Telephone and Internet expense (sales) 17,000

Accounting and legal services 33,000 Utilities expense (office) 32,000

Insurance expense (office) 24,000 Miscellaneous office expenses 8,000

Advertising expense 54,000 Rent revenue 240,000

Delivery expense 93,000 Casualty loss (before tax) 70,000

Depreciation expense (office equipment) 48,000 Depreciation expense (sales equipment) 36,000

Common stock (\(10 par) 900,000 Interest expense 176,000

Spock’s effective tax rate on all items is 34%. A physical inventory indicates that the ending inventory is \)686,000.

Instructions

Prepare a condensed 2017 income statement for Spock Corporation.

Brisky Corporation had net sales of \(2,400,000 and interest revenue of \)31,000 during 2017. Expenses for 2017 were cost of goods sold \(1,450,000, administrative expenses \)212,000, selling expenses \(280,000, and interest expense \)45,000. Brisky’s tax rate is 30%. The corporation had 100,000 shares of common stock authorized and 70,000 shares issued and outstanding during 2017. Prepare a single-step income statement for the year ended December 31, 2017.

(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.

How can information based on past transactions be used to predict future cash flows?

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