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Chapter 4: Q4-3CA (page 190)

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

  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鈥檚 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

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鈥檚 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.

(Income Statement, EPS) Presented below are selected ledger accounts of Tucker Corporation as of December 31, 2017.

Cash $50,000

Administrative expenses 100,000

Selling expenses 80,000

Net sales 540,000

Cost of goods sold 210,000

Cash dividends declared (2017) 20,000

Cash dividends paid (2017) 15,000

Discontinued operations (loss before income taxes) 40,000

Depreciation expense, not recorded in 2016 30,000

Retained earnings, December 31, 2016 90,000

Effective tax rate 30%

Instructions

  1. Compute net income for 2017.
  2. Prepare a partial income statement beginning with income from continuing operations before income tax, and including appropriate earnings per share information. Assume 10,000 shares of common stock were outstanding during 2017.

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

How should the disposal of a component of a business be disclosed in the income statement?

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.
See all solutions

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