Learning Materials
Features
Discover
Chapter 4: Question 21Q (page 181)
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?
Any unusual gain does not affect the reporting of usual gain.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
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.)
(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.
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.
Question: As audit partner for Grupo and Rijo, you are in charge of reviewing the classification of unusual items that have occurred during the current year. The following material items have come to your attention.
1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed.
2. An automobile dealer sells for \(137,000 an extremely rare 1930 S type Invicta which it purchased for \)21,000 10 years ago. The Invicta is the only such display item the dealer owns.
3. A drilling company during the current year extended the estimated useful life of certain drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered.
4. A retail outlet changed its computation for bad debt expense from 1% to ½ of 1% of sales because of changes in its customer clientele. Concepts for Analysis 191 192 Chapter 4 Income Statement and Related Information.
5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries.
6. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes.
7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved.
8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year.
9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year.
10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.
11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers. This represents a strategic shift in the company business.
Instructions
From the foregoing information, indicate in what section of the income statement or retained earnings statement these items should be classified. Provide a brief rationale for your position.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App