Question & Answer

What is meant by “tax allocation within a period”? What is the justification for such practice?

Qualls Corporation reported 2014 earnings per share of $7.21. In 2015, Qualls reported earnings per share as follows. On income before extraordinary item $6.40

On extraordinary item 1.88 On net income $8.28Is the increase in earnings per share from $7.21 to $8.28 a favorable trend?

Neumann Company computed earnings per share as follows. Net incomeCommon shares outstanding at year-end Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.

What effect does intraperiod tax allocation have on reported net income?

Lebron Co. owns most but not all of the shares of its subsidiary Bryant Inc. Lebron reported net income of $124,700. The amount to be attributed to the noncontrolling interest in Bryant is $30,000. Indicate how Lebron will report the noncontrolling interest in its income statement.

Discuss the appropriate treatment in the income statement for the following items:

(a) Loss on discontinued operations.

(b) Noncontrolling interest allocation.

(c) Earnings per share.

(d) Gain on sale of equipment.

Cooper Investments reported an unusual gain from the sale of certain assets in its 2014 income statement. How does intraperiod tax allocation affect the reporting of this unusual gain?

Santo Corporation has eight expense accounts in its general ledger which could be classified as selling expenses. Should Santo report these eight expenses separately in its income statement or simply report one total amount for selling expenses?

You run into Greg Norman at a party and begin discussing financial statements. Greg says, “I prefer the single-step income statement because the multiple-step format generally overstates income.” How should you respond to Greg?

Perlman Land Development, Inc. purchased land for $70,000 and spent $30,000 developing it. It then sold the land for $160,000. Sheehan Manufacturing purchased land for a future plant site for $100,000. Due to a change in plans, Sheehan later sold the land for $160,000. Should these two companies report the land sales, both at gains of $60,000, in a similar manner?

Indicate the section of a multiple-step income statement in which each of the following is shown.

(a) Loss on inventory write-down.

(b) Loss from strike.

(c) Bad debt expense.

(d) Loss on disposal of a component of the business.

(e) Gain on sale of machinery.

(f) Interest revenue.

(g) Depreciation expense.

(h) Material write-offs of notes receivable.

Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2014.

(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 2014, a flood destroyed a warehouse that had a book value of $1,600,000. Floods are rare in this locality.

(c) In 2014, the company wrote off $1,000,000 of inventory that was considered obsolete.

(d) An income tax refund related to the 2011 tax year was received.

(e) In 2011, a supply warehouse with an expected useful life of 7 years was erroneously expensed.

(f) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.

Discuss the appropriate treatment in the financial statements of each of the following.

(a) An amount of $113,000 realized in excess of the cash surrender value of an insurance policy on the life of one of the founders of the company who died during the year.

(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.

How should correction of errors be reported in the financial statements?

Distinguish between the modified all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended? Explain.

What is the basis for distinguishing between operating and nonoperating items?

What are the advantages and disadvantages of the singlestep income statement?

What is the major distinction (a) between revenues and gains and (b) between expenses and losses?

A Wall Street Journal article noted that Apple reported higher income than its competitors by using a more aggressive policy for recognizing revenue on future upgrades to its products. Some contend that Apple’s quality of earnings is low. What does the term “quality of earnings” mean?

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?

How can earnings management affect the quality of earnings?

What is earnings management?

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

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

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