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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.
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During 2017, Liselotte Company reported income of \(1,500,000 before income taxes and realized a gain of \)450,000 on the disposal of assets related to a discontinued operation. The criteria for classification as a discontinued operation is appropriate for this sale. The income is subject to income taxation at the rate of 34%. The gain on the sale of the plant is taxed at 30%. Indicate an appropriate presentation of these items in the income statement.
The following financial statement was prepared by employees of Walters Corporation.
WALTERS CORPORATION
INCOME STATEMENT
THE YEAR ENDED DECEMBER 31, 2017
Revenues
Gross sales, including sales taxes \(1,044,300
Less: Returns, allowances, and cash discounts 56,200
Net sales 988,100
Dividends, interest, and purchase discounts 30,250
Recoveries of accounts written off in prior years 13,850
Total revenues 1,032,200
Costs and expenses
Cost of goods sold, including sales taxes 465,900
Salaries and related payroll expenses 60,500
Rent 19,100
Delivery expense and freight in 3,400
Bad debt expense 27,800
Total costs and expenses 576,700
Income before other items 455,500
Other items
Loss on discontinued styles (Note 1) 71,500
Loss on sale of marketable securities (Note 2) 39,050
Loss on sale of warehouse (Note 3) 86,350
Total other items 196,900
Net income \)258,600
Net income per share of common stock \(2.30
Note 1: New styles and rapidly changing consumer preferences resulted in a \)71,500 loss on the disposal of discontinued styles and related accessories.
Note 2: The Corporation sold an investment in marketable securities at a loss of \(39,050. The corporation normally sells securities of this nature.
Note 3: The Corporation sold one of its warehouses at an \)86,350 loss.
Instructions
Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You should explain why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.
Discuss the appropriate treatment in the income statement for the following items:
(a) Loss on discontinued operations.
(b) Non-controlling interest allocation.
(c) Earnings per share.
(d) Gain on sale of equipment.
Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2017.
(a) The service life of certain equipment was changed from 8 to 5 years. If a 5-year life had been used previously, additional depreciation of \(425,000 would have been charged.
(b) In 2017, a flood destroyed a warehouse that had a book value of \)1,600,000. Floods are rare in this locality.
(c) In 2017, the company wrote off $1,000,000 of inventory that was considered obsolete.
(d) In 2014, a supply warehouse with an expected useful life of 7 years was erroneously expensed.
(e) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.
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?
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