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Chapter 4: 3 (page 179)
Identify at least two situations in which important changes in value are not reported in the income statement.
Unrealized gains or losses on investments that are available for sale and changes in the fair values of long-term liabilities are not recognized in the income statement.
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Charlie Brown, the controller for Kelly Corporation, is preparing the company鈥檚 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鈥� lives, the losses would not be so great. Since depreciation is included among the company鈥檚 operating expenses, he wants to report the losses along with the company鈥檚 expenses, where he hopes it will not be noticed.
Instructions
Presented below are changes in all the account balances of Fritz Mayhew Furniture Co. during the current year, except for retained earnings.
Increase Increase
(Decrease) (Decrease)
Cash \(79,000 Accounts Payable
Accounts Receivable (net) \)45,000 Bonds Payable \(82,000
Inventory \)127,000 Common Stock \(125,000
Investments (47,000) Paid-In Capital in Excess of Par \)13,000
Instructions
Compute the net income for the current year, assuming that there were no entries in the Retained Earnings account except for net income and a dividend declaration of $19,000 which was paid in the current year.
When does tax allocation within a period become necessary? How should this allocation be handled?
How can earnings management affect the quality of earnings?
Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
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