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Chapter 4: Question 20Q (page 180)

Santo Corporation has eight expense accounts in its general ledger, classified as selling expenses. Should Santo report these eight expenses separately in its income statement or report one total amount for selling expenses?

Short Answer

Expert verified

Santo Corporation may report these expenses by choosing one of the two methods available.

Step by step solution

01

Meaning of Selling Expenses

Selling general and administrative expenses include all expenses directly incurred for sales and administrative fees.

02

Explanation for reporting selling expenses

Both the formats are acceptable but presenting a single expense amount may be preferably supported by a schedule of eight components in the notes to financial statements if the condensed version is adopted. By disclosing all the results of the activities, a reader can understand and discover the facts of importance.

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Most popular questions from this chapter

Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As an 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 report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations.

Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be subject to reporting outside operating income?

Controller: I am not sure whether this item should get special reporting 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

  1. 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?
  2. How should the walkout by the employees be reported?
  3. What do you think about the vice president’s observation of materiality?
  4. What are the earnings per share implications of these topics?

Question: At December 31, 2016, Shiga Naoya Corporation had the following stock outstanding.

10% cumulative preferred stock, \(100 par, 107,500 shares \)10,750,000

Common stock, \(5 par, 4,000,000 shares 20,000,000

During 2017, Shiga Naoya did not issue any additional common stock. The following also occurred during 2017.

Income from continuing operations before taxes \)23,650,000

Discontinued operations (loss before taxes) \(3,225,000

Preferred dividends declared \)1,075,000

Common dividends declared $2,200,000

Effective tax rate 35%

Instructions

Compute earnings per share data as it should appear in the 2017 income statement of Shiga Naoya Corporation. (Round to two decimal places.)

Question: Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017.

(000 omitted)

Net sales revenue \(640,000

Costs and expenses

Cost of goods sold \)500,000

Selling, general, and administrative expenses 66,000

Other, net 17,000

583,000

Income before income tax 57,000

Income tax 19,400

Net income 37,600

Retained earnings at beginning of period, as previously reported 141,000

Adjustment required for correction of error (7,000)

Retained earnings at beginning of period, as restated 134,000

Dividends on common stock (12,200)

Retained earnings at end of period \(159,400

Additional facts are as follows.

1. “Selling, general, and administrative expenses” for 2017 included a charge of \)8,500,000 that was usual but infrequently occurring.

2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000.

3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).

4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.

Instructions

Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)

What is earnings management?

Cooper Investments reported an unusual gain from the sale of certain assets in its 2017 income statement. How does intra period tax allocation affect the reporting of this unusual gain?
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