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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

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.

Identify at least two situations in which important changes in value are not reported in the income statement.

Neumann Company computed earnings per share as follows.

Net income

_____________________________________

Common shares outstanding at year-end

Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

Presented below is information related to Viel Company on December 31, 2017, the end of its first year of operations.

Sales revenue $310,000

Cost of goods sold 140,000

Selling and administrative expenses 50,000

Gain on sale of plant assets 30,000

Unrealized gain on non-trading equity securities 10,000

Interest expense 6,000

Loss on discontinued operations 12,000

Allocation to non-controlling interest 40,000

Dividends declared and paid 5,000

Instructions

Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Viel Company controlling shareholders, (d) comprehensive income, and (e) retained earnings balance on December 31, 2017. (Ignore income taxes.)
See all solutions

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