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Chapter 4: Question 18Q (page 180)

Perlman Land Development, Inc. purchased land for \(70,000 and spent \)30,000 developing it. It then sold the land for \(160,000. Sheehan Manufacturing purchased land for a future plant site for \)100,000. Due to a change in plans, Sheehan later sold the land for \(160,000. Should these two companies report the land sales, both at gains of \)60,000, in a similar manner?

Short Answer

Expert verified

No, both the business concerns are required to treat gain on sale of land in a different manner.

Step by step solution

01

Meaning of Business Concern

The term business concern refers to an entity established to generate revenues. It is a must for a business concern to perform ethical commercial activities such as selling and purchasing products or services.

02

Treatment of gain on sale of land

According to the given scenario, the gain will remain the same for Perlman Land Development and Sheehan Manufacturing, but recording such a gain would be different.

As purchase and sale of land are the operating activity for the Perlman Land Development, the gain will be considered operating profit.

On the other hand, gain on land sale is non-operating; hence, it should be considered an extraordinary gain.

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Most popular questions from this chapter

Presented below are certain account balances of Paczki Products Co.

Rent revenue \(6,500 Sales discounts \)7,800

Interest expense \(12,700 Selling expenses \)99,400

Beginning retained earnings \(114,400 Sales revenue \)390,000

Ending retained earnings \(125,000Income tax expense \)31,000

Dividend revenue \(71,000Cost of goods sold \)184,000

Sales returns and allowances \(12,400Administrative expenses \)82,500

Allocation to non controlling interest $17,000

Instructions

From the foregoing, compute the following: (a) total net revenue, (b) net income, (c) dividends declared, and (d) income attributable to controlling stockholders.

What is meant by “tax allocation within a period”? What is the justification for such practice?

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

Discuss the appropriate treatment in the financial statements of each of the following.

(a) Gain on sale of investment securities.

(b) A profit-sharing bonus to employees computed as a percentage of net income.

(c) Additional depreciation on factory machinery because of an error in computing depreciation for the previous year.

(d) Rent received from subletting a portion of the office space.

(e) A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of $725,000.

(f) A reduction in the Allowance for Doubtful Accounts balance because the account appears to be considerably in excess of the probable loss from uncollectible receivables.

The following account balances were included in the trial balance of Twain Corporation at June 30, 2017.

Sales revenue \(1,578,500

Depreciation expense (office furniture and equipment) \)7,250

Sales discounts \(31,150

Cost of goods sold \)896,770

Property tax expense \(7,320

Salaries and wages expense (sales) \)56,260

Bad debt expense (selling) \(4,850

Sales commissions \)97,600

Maintenance and repairs expense (administration) \(9,130

Travel expense (salespersons) \)28,930

Delivery expense \(21,400

Office expense \)6,000

Entertainment expense \(14,820

Sales returns and allowances \)62,300

Telephone and Internet expense (sales) \(9,030

Dividends received \)38,000

Depreciation expense (sales equipment) \(4,980

Interest expense \)18,000

Maintenance and repairs expense (sales) \(6,200

Income tax expense \)102,000

Miscellaneous selling expenses \(4,715

Depreciation understatement due to error—2014 (net of tax) \)17,700

Office supplies used \(3,450

Telephone and Internet expense (administration) \)2,820

Dividends declared on preferred stock \(9,000

Dividends declared on common stock \)37,000

The Retained Earnings account had a balance of $337,000 at July 1, 2016. There are 80,000 shares of common stock outstanding.

Instructions

(b) Using the single-step form, prepare an income statement and a retained earnings statement for the year ended June 30, 2017.
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