Escolar Documentos
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AACSB assurance of learning standards in accounting and business education require documentation
of outcomes assessment. Although schools, departments, and faculty may approach assessment and
its documentation differently, one approach is to provide specific questions on exams that become the
basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and
problem in Intermediate Accounting, 7e, with the following AACSB learning skills:
Questions
41
42
43
44
45
46
47
48
49
410
411
412
413
414
415
416
417
418
419
420
421
AACSB Tags
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking, Commun.
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Brief Exercises
41
42
43
44
45
46
47
48
49
410
411
412
413
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Brief Exercise
AACSB Tags
414
Exercises
41
42
43
44
45
46
47
48
49
410
411
412
413
414
415
416
417
418
419
420
421
422
CPA/CMA
1
2
3
4
5
6
7
8
1
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Reflective thinking
Analytic
Reflective thinking
Analytic
Diversity, Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Communications
Communications
Reflective thinking
Reflective thinking
Analytic
Analytic
Analytic
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
CPA/CMA
AACSB Tags
2
3
Reflective thinking
Reflective thinking
Problems
41
42
43
45
46
47
48
49
410
411
Analytic
Analytic, Reflective thinking
Analytic, Reflective thinking
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Question 42
Income from continuing operations includes the revenue, expense, gain, and loss transactions
that will probably continue in future periods. It is important to segregate the income effects of these
items because they are the most important transactions in terms of predicting future cash flows.
Question 43
Operating income includes revenues and expenses and gains and losses that are directly related
to the principal revenue generating activities of the company. Nonoperating income includes items
that are not directly related to these activities.
Question 44
The single-step format first lists all revenues and gains included in income from continuing
operations to arrive at total revenues and gains. All expenses and losses are then grouped and
subtotaled, subtracted from revenues and gains to arrive at income from continuing operations. The
multiple-step format reports a series (multiple) of intermediate totals such as gross profit, operating
income, and income before taxes. Very often income statements adopt variations of these formats,
falling somewhere in between the two extremes.
Question 45
The term earnings quality refers to the ability of reported earnings (income) to predict a
companys future earnings. After all, an income statement simply reports on events that already have
occurred. The relevance of any historical-based financial statement hinges on its predictive value.
Question 46
Restructuring costs include costs associated with shutdown or relocation of facilities or
downsizing of operations. They are reported as an operating expense in the income statement.
Question 47
The process of intraperiod tax allocation matches tax expense or tax benefit with each major
component of income, specifically continuing operations and any item reported below continuing
operations. The process is necessary to achieve the desired result of separating the total income
effects of continuing operations from the two separately reported itemsdiscontinued operations and
extraordinary itemsand also to show the after-tax effect of each of those two components.
Question 49
Extraordinary items are material gains and losses that are both unusual in nature and infrequent
in occurrence, taking into account the environment in which the entity operates.
Question 410
Extraordinary gains and losses are presented, net of tax, in the income statement below
discontinued operations, if any.
Question 412
A change in accounting estimate is accounted for in the year of the change and in subsequent
periods; prior years financial statements are not restated. A disclosure note should justify that the
change is preferable and should describe the effect of a change on any financial statement line items
and per share amounts affected for all periods reported.
Question 413
Prior period adjustments are accounted for by restating prior years financial statements when
those statements are presented again for comparison purposes. The beginning of period retained
earnings is increased or decreased on the statement of shareholders equity (or the statement of
retained earnings) as of the beginning of the earliest period presented.
Question 415
Comprehensive income is the total change in equity for a reporting period other than from
transactions with owners. Reporting comprehensive income can be accomplished with a continuous
statement of comprehensive income that includes an income statement and other comprehensive
income items or in two statements, an income statement and a separate statement of comprehensive
income.
Question 416
The purpose of the statement of cash flows is to provide information about the cash receipts and
cash disbursements of an enterprise during a period. Similar to the income statement, it is a change
statement, summarizing the transactions that caused cash to change during a particular period of time.
Question 417
The three categories of cash flows reported on the statement of cash flows are:
1. Operating activitiesInflows and outflows of cash related to the transactions entering into
the determination of net income from operations.
2. Investing activitiesInvolve the acquisition and sale of (1) long-term assets used in the
business and (2) nonoperating investment assets.
3. Financing activitiesInvolve cash inflows and outflows from transactions with creditors
and owners.
Question 418
Noncash investing and financing activities are transactions that do not increase or decrease cash
but are important investing and financing activities. An example would be the acquisition of property,
plant, and equipment (an investing activity) by issuing either long-term debt or equity securities (a
financing activity). These activities are reported either on the face of the statement of cash flows or in
a disclosure note.
Question 419
The direct method of reporting cash flows from operating activities presents the cash effect of
each operating activity directly on the statement of cash flows. The indirect method of reporting cash
flows from operating activities is derived indirectly, by starting with reported net income and adding
and subtracting items to convert that amount to a cash basis.
Question 421
U.S. GAAP designates cash outflows for interest payments and cash inflows from interest and
dividends received as operating cash flows. Dividends paid to shareholders are classified as financing
cash flows. IFRS allows more flexibility. Companies can report interest and dividends paid as either
operating or financing cash flows and interest and dividends received as either operating or investing
cash flows. Interest and dividend payments usually are reported as financing activities. Interest and
dividends received normally are classified as investing activities.
BRIEF
EXERCISES
Brief
Exercise 41
PACIFIC SCIENTIFIC CORPORATION
Income Statement
For the Year Ended December 31, 2013
($ in millions)
$2,106
45
2,151
$1,240
126
105
35
1,506
645
258
$ 387
Brief Exercise 42
(a)
Sales revenue
$2,106
45
(35)
$10
Brief Exercise 43
$2,106
1,240
866
$126
105
231
635
45
(35)
10
645
258
$ 387
*$645 x 40%
Brief Exercise 44
(a)
Sales revenue
$300,000
(160,000)
(40,000)
(50,000)
(25,000)
$ 25,000
(b)
Operating income
Add: Interest revenue
Deduct: Loss on sale of investments
Income before income taxes and
Income tax expense (40%)
Income before extraordinary item
$25,000
4,000
(22,000)
7,000
(2,800)
$ 4,200
(c)
$ 4,200
(30,000)
(25,800)
Brief Exercise 45
MEMORAX COMPANY
Partial Income Statement
For the Year Ended December 31, 2013
Income before income taxes and extraordinary item............
Income tax expense* ...........................................................
Income before extraordinary item .......................................
Extraordinary item:
Loss from earthquake, net of $208,000 tax benefit...........
Net income ...........................................................................
Solutions Manual, Vol.1, Chapter 4
$ 790,000
316,000
474,000
(312,000)
$ 162,000
*$790,000 x 40%
Brief Exercise 46
WHITE AND SONS, INC.
Partial Income Statement
For the Year Ended December 31, 2013
Income before income taxes and extraordinary item............
Income tax expense* ...........................................................
Income before extraordinary item .......................................
Extraordinary item:
Loss from earthquake, net of $160,000 tax benefit...........
Net income ...........................................................................
$ 850,000
340,000
510,000
(240,000)
$ 270,000
$ 5.10
(2.40)
$ 2.70
*$850,000 x 40%
Note: Restructuring costs, interest revenue, and loss on sale of investments are
included in income before income taxes and extraordinary item.
Brief Exercise 47
CALIFORNIA MICROTECH CORPORATION
Partial Income Statement
For the Year Ended December 31, 2013
Income from continuing operations before income taxes.....
Income tax expense* ............................................................
Income from continuing operations .....................................
Discontinued operations:
The McGraw-Hill Companies, Inc., 2013
410
$ 5,800,000
1,740,000
$ 4,060,000
Intermediate Accounting, 7/e
(1,600,000)
480,000
(1,120,000)
$ 2,940,000
* $5,800,000 x 30%
** Loss from operations of discontinued component:
Gain on sale of assets
Loss from operations
Total before-tax loss
Brief Exercise 48
CALIFORNIA MICROTECH CORPORATION
Partial Income Statement
For the Year Ended December 31, 2013
Income from continuing operations before income taxes.....
Income tax expense* ............................................................
Income from continuing operations .....................................
Discontinued operations:
Loss from operations of discontinued component** .........
Income tax benefit ............................................................
Loss on discontinued operations .......................................
Net income ...........................................................................
$ 5,800,000
1,740,000
$ 4,060,000
(3,600,000)
1,080,000
(2,520,000)
$ 1,540,000
* $5,800,000 x 30%
** Includes only the loss from operations. There is no impairment loss.
Brief Exercise 49
CALIFORNIA MICROTECH CORPORATION
Partial Income Statement
Solutions Manual, Vol.1, Chapter 4
$ 5,800,000
1,740,000
$ 4,060,000
(4,600,000)
1,380,000
(3,220,000)
$ 840,000
* $5,800,000 x 30%
** Loss from operations of discontinued component:
Impairment loss ($8 million book value less
$7 million net fair value)
Loss from operations
Total before-tax loss
$(1,000,000)
(3,600,000)
$(4,600,000)
$650,000
$(36,000)
24,000
(12,000)
$638,000
$ 660,000
12,000
(18,000)
(440,000)
$214,000
Only these four cash flow transactions relate to operating activities. The others are
investing and financing activities.
$100,000
40,000
The McGraw-Hill Companies, Inc., 2013
413
Purchase of equipment
Net cash flows from investing activities
Cash flows from financing activities:
Issuance of common stock
Payment of dividends
Net cash flows from financing activities
(120,000)
$20,000
$200,000
(30,000)
170,000
Brief Exercise
$45,000
80,000
(60,000)
15,000
12,000
$92,000
follows:
Cash flows from operating activities:
Collections from customers
Payment of operating expenses
Net cash flows from operating activities
Cash flows from investing activities:
Proceeds from note receivable collection
Sale of land
Interest on note receivable
Purchase of equipment
Net cash flows from investing activities
Cash flows from financing activities:
Issuance of common stock
The McGraw-Hill Companies, Inc., 2013
414
$ 660,000
(440,000)
$220,000
$100,000
40,000
12,000
(120,000)
$32,000
$200,000
Intermediate Accounting, 7/e
Payment of dividends
Interest on note payable
Net cash flows from financing activities
(30,000)
(18,000)
152,000
EXERCISES
Exercise 41
Requirement 1
GREEN STAR CORPORATION
Income Statement
For the Year Ended December 31, 2013
Revenues and gains:
Sales ..................................................................
Interest ..............................................................
Gain on sale of investments ...............................
Total revenues and gains ................................
Expenses and losses:
Cost of goods sold .............................................
Selling................................................................
General and administrative.................................
Interest...............................................................
Total expenses and losses ..............................
Income before income taxes ................................
Income tax expense .............................................
Net income ...........................................................
Earnings per share ...............................................
$1,300,000
30,000
50,000
1,380,000
$720,000
160,000
75,000
40,000
995,000
385,000
130,000
$ 255,000
$2.55
Exercise 41 (concluded)
Requirement 2
GREEN STAR CORPORATION
Income Statement
For the Year Ended December 31, 2013
Sales revenue .......................................................
Cost of goods sold ...............................................
Gross profit ..........................................................
Operating expenses:
Selling................................................................
General and administrative.................................
Total operating expenses ................................
Operating income .................................................
Other income (expense):
Interest revenue .................................................
Gain on sale of investments ...............................
Interest expense .................................................
Total other income, net ..................................
Income before income taxes ...............................
Income tax expense .............................................
Net income ...........................................................
Earnings per share ...............................................
$1,300,000
720,000
580,000
$160,000
75,000
235,000
345,000
30,000
50,000
(40,000)
40,000
385,000
130,000
$ 255,000
$2.55
Exercise 42
Requirement 1
$2,350,000
80,000
2,430,000
$1,200,300
300,000
150,000
90,000
22,500
200,000
1,962,800
467,200
186,880
280,320
(72,000)
$ 208,320
$ .93
(.24)
$ .69
* 40% x $467,200
Exercise 42 (concluded)
Requirement 2
GENERAL LIGHTING CORPORATION
Income Statement
For the Year Ended December 31, 2013
Sales revenue .......................................................
Cost of goods sold ...............................................
Gross profit ..........................................................
Operating expenses:
Selling ...............................................................
General and administrative ................................
Loss from inventory write-down .......................
Total operating expenses ................................
Operating income .................................................
Other income (expense):
Rental revenue ..................................................
Loss on sale of investments ...............................
Interest expense .................................................
Total other income (expense), net ..................
Income before income taxes and extraordinary
item....................................................................
Income tax expense *............................................
Income before extraordinary item ........................
Extraordinary item:
Loss from flood damage (net of $48,000 tax benefit)
Net income ...........................................................
Earnings per share:
Income before extraordinary item ........................
Extraordinary loss ................................................
Net income ...........................................................
$2,350,000
1,200,300
1,149,700
$300,000
150,000
200,000
650,000
499,700
80,000
(22,500)
(90,000)
(32,500)
467,200
186,880
280,320
(72,000)
$ 208,320
$ .93
(.24)
$ .69
* 40% x $467,200
Exercise 43
LINDOR CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2013
Sales revenue ....................................................................
Cost of goods sold ............................................................
Gross profit .......................................................................
$2,300,000
1,400,000
900,000
Operating expenses:
Selling and administrative...............................................
Operating income .............................................................
420,000
480,000
56,000
$644,000
$ 0.31
0.28
$ 0.59
(40,000)
440,000
132,000
308,000
280,000
588,000
* 30% x $440,000
Exercise 44
AXEL CORPORATION
Income Statement
For the Year Ended December 31, 2013
Sales revenue ....................................................................
Solutions Manual, Vol.1, Chapter 4
$ 592,000
The McGraw-Hill Companies, Inc., 2013
419
325,000
267,000
$67,000
87,000
55,000
209,000
58,000
32,000
(26,000)
6,000
64,000
25,600
38,400
51,600
$ 90,000
$ .38
.52
$0.90
* 40% x $64,000
Exercise 45
CHANCE COMPANY
Partial Income Statement
For the Year Ended December 31, 2013
Income from continuing operations .....................................
Discontinued operations:
Loss from operations of discontinued component
(including loss on disposal of $400,000)* ................................
Income tax benefit ............................................................
Loss on discontinued operations .......................................
Net income ...........................................................................
The McGraw-Hill Companies, Inc., 2013
420
$ 350,000
(530,000)
212,000
(318,000)
$ 32,000
Intermediate Accounting, 7/e
$ 3.50
(3.18)
$ .32
$(400,000)
(130,000)
(530,000)
212,000
$(318,000)
Exercise 46
ESQUIRE COMIC BOOK COMPANY
Partial Income Statement
For the Year Ended December 31, 2013
Income from continuing operations * ...................................
$ 552,000
Discontinued operations:
Income from operations of discontinued component
(including loss on disposal of $350,000) ..................................
Income tax expense ...........................................................
Income on discontinued operations ...................................
Net income............................................................................
150,000
60,000
90,000
$642,000
$1,000,000
(80,000)
920,000
(368,000)
$ 552,000
The McGraw-Hill Companies, Inc., 2013
421
Exercise 47
Requirement 1
$ 400,000
Discontinued operations:
Loss from operations of discontinued component
(including impairment loss of $50,000) * ...............................
Income tax benefit.............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................
(190,000)
76,000
(114,000)
$ 286,000
$(140,000)
(50,000)
(190,000)
76,000
$(114,000)
Requirement 2
KANDON ENTERPRISES, INC.
Partial Income Statement
For the Year Ended December 31, 2013
Income from continuing operations .....................................
$ 400,000
Discontinued operations:
Loss from operations of discontinued component *..........
Income tax benefit ............................................................
Loss on discontinued operations .......................................
Net income ..........................................................................
(140,000)
56,000
(84,000)
$ 316,000
*Includes only the operating loss during the year. There is no impairment loss.
The McGraw-Hill Companies, Inc., 2013
422
Exercise 48
Pretax income from continuing operations
Income tax expense
Income from continuing operations
Less: Net income
Loss from discontinued operations
$14,000,000
(5,600,000)
8,400,000
7,200,000
$1,200,000
Exercise 49
$4,000,000
2,000,000
$6,000,000
$11,000,000
6,000,000
$17,000,000
$5.00
(1.60)
2.20
$5.60
Exercise 410
THE MASSOUD CONSULTING GROUP
Statement of Comprehensive Income
For the Year Ended December 31, 2013
Solutions Manual, Vol.1, Chapter 4
1.___ b
Exercise 411cash.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
a_
a_
c_
b_
c_
b_
a_
d_
c_
c_
$1,354,000
$168,000
(56,000)
112,000
$1,466,000
Exercise 412
$131,000
50,000
Intermediate Accounting, 7/e
Sale of investments
Purchase of equipment
Net cash flows from investing activities
Cash flows from financing activities:
Proceeds from note payable
Payment of note payable
Payment of dividends
Net cash flows from financing activities
Net increase in cash
Cash and cash equivalents, January 1
Cash and cash equivalents, December 31
30,000
(85,000)
(5,000)
100,000
(25,000)
(20,000)
55,000
181,000
17,000
$ 198,000
Exercise 413
Standards.
Cash paid for interest, considered an operating cash flow by U.S. GAAP, could be
classified as either an operating cash flow or a financing cash flow according to
International Accounting Standards.
Cash paid for dividends, considered a financing cash flow by U.S. GAAP, could
be classified as either an operating cash flow or a financing cash flow according to
International Accounting Standards.
Accordingly, the statement of cash flows prepared according to IFRS could be the
same as under U.S. GAAP (E412) or could be presented as follows:
BLUEBONNET BAKERS
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash flows from operating activities:
Collections from customers
$ 380,000
Purchase of inventory
(160,000)
Payment of salaries
(90,000)
Payment of dividends
(20,000)
Net cash flows from operating activities
Cash flows from investing activities:
Collection of note receivable
Interest on note receivable
Sale of investments
Purchase of equipment
Net cash flows from investing activities
50,000
6,000
30,000
(85,000)
100,000
(25,000)
(5,000)
$110,000
1,000
70,000
181,000
17,000
$ 198,000
Exercise 414
Net income
Adjustments for noncash effects:
Depreciation expense
Changes in operating assets and liabilities:
Increase in accounts receivable
Decrease in inventory
Decrease in prepaid insurance
Decrease in salaries payable
Increase in interest payable
Net cash flows from operating activities
$17,300
7,800
(4,000)
5,500
1,200
(2,700)
800
$25,900
Requirement 1
Exercise 415
1.
2.
3.
4.
5.
6.
7.
8.
9.
Financing
$300,000
Investing
Operating
$(10,000)
$ (5,000)
(6,000)
(70,000)
55,000
__________
__________
__________
$300,000
$(10,000)
$(26,000)
$264,000
$ 55,000
(5,000)
(6,000)
(70,000)
$ (26,000)
(10,000)
(10,000)
300,000
300,000
264,000
40,000
$ 304,000
Exercise 416
Net income
Adjustments for noncash effects:
Depreciation and amortization expense
Changes in operating assets and liabilities:
Decrease in accounts receivable
Increase in inventories
Increase in prepaid expenses
Increase in salaries payable
Decrease in income taxes payable
The McGraw-Hill Companies, Inc., 2013
428
$624,000
87,000
22,000
(9,200)
(8,500)
10,000
(14,000)
Intermediate Accounting, 7/e
$ 353,000
(186,000)
(67,000)
$100,000
4,000
2,400
100,000
(154,000)
(47,600)
Exercise 418
Solutions Manual, Vol.1, Chapter 4
(8,000)
200,000
(40,000)
152,000
204,400
28,600
$233,000
TIGER ENTERPRISES
(300)
100
Cash, January 1
Cash, December 31
200
$ 300
(1)
+ Net income
Dividends
Retained earnings, ending
900
x
$500
$540
x = $940
Based on the information in the T-accounts above, the operating activities section
of the SCF for Tiger Enterprises would be as shown next.
$ 7,080
(130)
(3,460)
(1,900)
(550)
$ 1,040
Exercise 420Requirement 1
FASB ASC 260: Earnings per Share.
Requirement 2
The specific citation that describes the additional information for earnings per
share that must be included in the notes to the financial statements is FASB ASC 260
10501: Earnings per ShareOverallDisclosure.
Requirement 3
For each period for which an income statement is presented, an entity discloses all
of the following:
a. A reconciliation of the numerators and the denominators of the basic and diluted
per-share computations for income from continuing operations. The reconciliation
includes the individual income and share amount effects of all securities that affect
earnings per share (EPS). Example 2 (see paragraph 260105551) illustrates
that disclosure. (See paragraph 26010453.) An entity is encouraged to refer to
pertinent information about securities included in the EPS computations that is
provided elsewhere in the financial statements as prescribed by Subtopic 505-10.
b. The effect that has been given to preferred dividends in arriving at income available
to common stockholders in computing basic EPS.
Exercise 421
1.
2.
The calculation of the weighted average number of shares for basic earnings
per share purposes:
3.
Exercise 422
The McGraw-Hill Companies, Inc., 2013
436
List A
f
2. Comprehensive income
a 3. Extraordinary items
l
4. Operating income
k 5. A discontinued operation
j
List B
a. Unusual, infrequent, and material gains
and losses.
b. Starts with net income and works
backwards to convert to cash.
c. Reports the cash effects of each operating
activity directly on the statement.
d. Correction of a material error of a prior
period.
e. Related to the external financing of the
company.
f. Associates tax with income statement
item.
g. Total nonowner change in equity.
h. Related to the transactions entering into
the determination of net income.
i. Related to the acquisition and disposition
of long-term assets.
j. Required disclosure for publicly traded
corporation.
k. A component of an entity.
l. Directly related to principal revenuegenerating activities.
$187,000
10,200
4,700
$201,900
The discontinued operations and the extraordinary gain are reported below
income from continuing operations.
4. a. The $400,000 impairment loss and the $1,000,000 loss from operations should
be combined for a total loss of $1,400,000.
5. a. Dividends paid to shareholders is considered a financing cash flow, not an
operating cash flow.
6. c. Issuing common stock for cash is considered a financing cash flow, not an
investing cash flow.
7. b. IFRS prohibits reporting extraordinary items, and restructuring costs are not
separately reported under both IFRS and U.S. GAAP. Both IFRS and U.S.
GAAP report discontinued operations as a separate item, net of tax.
The McGraw-Hill Companies, Inc., 2013
438
2.
3.
Problem
41
PROBLEMS
REED COMPANY
Comparative Income Statements
For the Years Ended December 31
Sales revenue .........................................................[1]
Cost of goods sold ................................................ [2]
Gross profit ...........................................................
2013
$4,000,000
2,570,000
1,430,000
Operating expenses:
Administrative .....................................................[3]
Selling ................................................................. [4]
Loss from fire damage .........................................
Loss from write-down of obsolete inventory .......
Total operating expenses .................................
Operating income ..................................................
750,000
340,000
50,000
35,000
1,175,000
255,000
[6]
[7]
[8]
[9]
2012
$3,000,000
1,680,000
1,320,000
635,000
282,000
--917,000
403,000
150,000
(200,000)
(50,000)
140,000
(200,000)
(60,000)
205,000
82,000
343,000
137,200
Intermediate Accounting, 7/e
123,000
205,800
(10,000)
4,000
(6,000)
117,000
110,000
(44,000)
66,000
271,800
(60,000)
$ 57,000
.41
(.02)
(.20)
$ .19
-$ 271,800
.69
.22
-$ .91
Problem 41 (concluded)
[1] $4,400,000 400,000
[2]
$2,860,000 290,000
[3]
$800,000 50,000
[4]
$360,000 20,000
$ 40,000
(50,000)
(10,000)
4,000
$ (6,000)
[6]
[7]
[8]
[9]
Problem 42
Requirement 1
2012
$1,300,000
520,000
780,000
200,000
(80,000)
120,000
$1,920,000
(300,000)
120,000
(180,000)
$ 600,000
[1]
2012
$(300,000)
$(300,000)
Problem 42 (concluded)
Requirement 2
The 2013 income from discontinued operations would include only the loss from
operations of $400,000. Since no impairment loss is indicated ($5,000,000 4,400,000
= $600,000 anticipated gain), none is included. The anticipated gain on disposal is not
recognized until it is realized, presumably in the following year.
Requirement 3
The 2013 income from discontinued operations would include the loss from
operations of $400,000 as well as an impairment loss of $500,000 ($4,400,000 book
value of assets less $3,900,000 fair value).
Problem 43Requirement 1
MICRON CORPORATION
Partial Income Statement
For the Year Ended December 31, 2013
Income from continuing operations before
income taxes and extraordinary item.........
Income tax expense .....................................
Income from continuing operations before
extraordinary item........................................
Discontinued operations:
Loss from operations of discontinued
component (including loss on disposal of
$300,000)
...................................................................
Income tax benefit
...................................................................
Loss on discontinued operations ...............
Income before extraordinary item ...............
Extraordinary item:
Loss from earthquake
(net of $240,000 tax benefit) ......................
The McGraw-Hill Companies, Inc., 2013
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[1] $1,300,000
390,000
910,000
$(140,000)
42,000
[2]
(98,000)
812,000
(560,000)
Intermediate Accounting, 7/e
$ 252,000
$ 160,000
(300,000)
(140,000)
42,000
$ (98,000)
Requirement 2
These events will not, or are unlikely to occur again in the near future. By
segregating them, users are better able to predict future cash flows.
1. Restructuring is an example of an event that is either unusual or
Problem 44 infrequent, but not both. Restructuring costs should be included in
income from continuing operations but reported as a separate
income statement component. The item is reported gross, not net
of tax as with extraordinary gains and losses.
2. The extraordinary gain should be presented, net of tax, in the income statement
below income from continuing operations. Also, earnings per share for income from
continuing operations and for the extraordinary item should be disclosed.
3. The correction of the error should be treated as a prior period adjustment to
beginning retained earnings, not as an adjustment to current year's cost of goods
sold. In addition, the 2012 financial statements should be restated to reflect the
correction, and a disclosure note is required that communicates the impact of the
error on 2012 income.
Problem 45
ALEXIAN SYSTEMS, INC.
Income Statement
For the Year Ended December 31, 2013
($ in millions except per share date)
[1]
$425
265
160
[2] $128
26
154
6
Other income:
Interest revenue .................................................
Gain on sale of investments ...............................
Total other income .........................................
Income before income taxes and extraordinary
item...................................................................
Income tax expense .............................................
Income before extraordinary item ........................
Extraordinary gain (net of $48 tax expense) ................
Net income ...........................................................
3
6
9
[3]
[4]
15
6
9
72
$ 81
$ 0.45
3.60
$ 4.05
Problem 46
REMBRANDT PAINT COMPANY
Income Statement
For the Year Ended December 31, 2013
$18,000
10,500
7,500
$2,500
800
400
120
3,300
4,200
(150)
4,050
1,215
2,835
280
3,115
2,100
5,215
$ 5.67
.56
4.20
$10.43
Problem 47
Requirement 1
SCHEMBRI MANUFACTURING CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2013
($ in 000s)
Sales revenue ...................................................................
Cost of goods sold ..........................................................
Gross profit .....................................................................
Operating expenses:
Selling ...........................................................................
General and administrative ...........................................
Restructuring costs .......................................................
Total operating expenses .........................................
Operating income ............................................................
$15,300
6,200
9,100
$1,300
800
1,200
3,300
5,800
(315)
5,485
2,194
3,291
504
3,795
(1,200)
2,595
48
$2,643
Problem 47 (concluded)
Earnings per share:*
Income from continuing operations before extraordinary
item
Discontinued operations
Extraordinary loss
Net income
$2.74
.42
(1.00)
$2.16
Note:
The depreciation expense error is a prior period adjustment (to retained earnings) and is not
reported in the income statement.
Requirement 2
SCHEMBRI MANUFACTURING CORPORATION
$2,595
$192
(144)
48
$2,643
Problem 48
DUKE COMPANY
Statement of Comprehensive Income
For the Year Ended December 31, 2013
Sales revenue ...................................................................
Cost of goods sold ..........................................................
Gross profit .....................................................................
Operating expenses:
General and administrative ...........................................
Selling ..........................................................................
Restructuring costs .......................................................
Loss from write-down of obsolete inventory
Total operating expenses ...........................................
Operating income ............................................................
Other income (expense):
Interest expense ............................................................
Income before income taxes and extraordinary item........
Income tax expense .........................................................
Income before extraordinary item ...................................
Extraordinary item:
Loss from expropriation of overseas plant (net
of $1,200,000 tax benefit) ............................................
Net Income.......................................................................
Other comprehensive income (loss):
Foreign currency translation adjustment loss, net of tax
Unrealized gains on investment securities, net of tax
Total other comprehensive loss
Comprehensive income
$15,000,000
9,000,000
6,000,000
$1,000,000
500,000
300,000
400,000
2,200,000
3,800,000
(700,000)
3,100,000
1,240,000
1,860,000
(1,800,000)
60,000
(120,000)
108,000
(12,000)
$ 48,000
Notes:
1. The restructuring costs and the loss from write-down of inventory are not extraordinary items.
2. The depreciation expense error is a prior period adjustment and is not reported in the income
statement.
Problem 49
Requirement 1
DIVERSIFIED PORTFOLIO CORPORATION
Statement of Cash Flows
$880,000
(660,000)
(85,000)
$135,000
50,000
50,000
100,000
(80,000)
20,000
205,000
70,000
$275,000
in accounts payable.
(3) $80,000 in income tax expense plus $5,000 decrease in income taxes payable.
Problem 49 (concluded)
Requirement 2
DIVERSIFIED PORTFOLIO CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash flows from operating activities:
Net income
$120,000
Adjustments for noncash effects:
Depreciation expense
30,000
Changes in operating assets and liabilities:
Increase in accounts receivable
(20,000)
Increase in accounts payable
10,000
Decrease in income taxes payable
(5,000)
Net cash flows from operating activities
$135,000
Problem 410
Requirement 1
2012 Cash:
2012 Cash + Net increase in cash = 2013 Cash
2012 Cash +
$86
= $145
2012 Cash = $59
2013 A/R:
2012 A/R + Cr. Sales Cash collections = 2013 A/R
$84 + 80
71
= $93
2012 Inventory:
2012 A/P + Purchases Cash paid = 2013 A/P
$30 + Purchases 30 = $40
Therefore, Purchases = $40
2012 Inventory + Purchases 2013 Inventory = Cost of goods sold
2012 Inventory +
$40
60
=
$32
2012 Inventory = $52
2012 Accumulated depreciation:
2013 accumulated depreciation less 2013 depreciation = 2012 accumulated depreciation
The McGraw-Hill Companies, Inc., 2013
452
$65 10 = $55
3
=
$72
2012 Total liabilities and shareholders equity:
$30 + 9 + 24 + 230 + 47 = $340
2013 Total liabilities and shareholders equity:
$40 + 9 + 22 + 240 + 72 = $383
$ 28
10
(15)
(9)
(8)
10
(2)
$14
$93 84
$60 52
$40 30
$22 24
Problem 411
SANTANA INDUSTRIES
Statement of Cash Flows
For the Year Ended December 31, 2013
($ in thousands)
$ 3,850
1,600
(300)
(1,000)
150
The McGraw-Hill Companies, Inc., 2013
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300
100
200
(250)
$4,650
(4,000)
500
(3,500)
5,150
Cash, January 1
Cash, December 31
2,200
$7,350
CASES
Judgment Case 41
Requirement 1
The term earnings quality refers to the ability of reported earnings (income) to
predict a companys future earnings. After all, an income statement simply reports on
events that already have occurred. The relevance of any historical-based financial
statement hinges on its predictive value.
Requirement 2
To enhance predictive value, analysts try to separate a companys transitory
earnings effects from its permanent earnings. Transitory earnings effects result from
transactions or events that are not likely to occur again in the foreseeable future, or that
are likely to have a different impact on earnings in the future.
Requirement 3
An often-debated contention is that, within GAAP, managers have the power, to a
limited degree, to manipulate reported company income. And the manipulation is not
always in the direction of higher income. Many believe that manipulating income
reduces earnings quality because it can mask permanent earnings.
The McGraw-Hill Companies, Inc., 2013
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Requirement 4
You would consider the size of the gain in relation to net income, the size of the
companys investment portfolio, and the frequency of gains and losses from the sale of
investment securities in past years. The main objective is to determine the likelihood of
this type of gain occurring again in the future.
Judgment Case 42
Requirement 1
Requirement 1
Companies often voluntarily provide a pro forma earnings number when they
announce annual or quarterly earnings calculated according to GAAP. These pro forma
earnings numbers are managements view of permanent earnings. These pro forma
earnings numbers are controversial as they represent managements biased view of
permanent earnings and should be interpreted in that light.
Solutions Manual, Vol.1, Chapter 4
Requirement 2
The term earnings quality refers to the ability of reported earnings (income) to
predict a companys future earnings. Management believes that pro forma earnings are
of much higher quality than reported earnings because they are more indicative of
future profitability.
The critical question that student groups should
Communication Case 45address is whether or not the gain on the sale of the
timber tracts should be reported as an extraordinary
item on the 2013 income statement. There is no
right or wrong answer. The process of developing the proposed solutions will likely be
more beneficial than the solutions themselves. Students should benefit from
participating in the process, interacting first with other group members, then with the
class as a whole.
Solutions should address the following issues:
1. Is the gain material? A consensus should be reached that the gain is material.
2. Is the event both unusual and infrequent? Debate should center on the critical
issue of whether the event is likely to occur again in the foreseeable future.
3. If the event is deemed to require presentation as an extraordinary item, the gain
should be reported net of tax below income from continuing operations. A
disclosure note also is required and earnings per share disclosure should reflect
the income statement presentation.
As a real world example of a similar situation, in 1974 Johns Manville
Corporation, manufacturer of asbestos products, reported a $21 million extraordinary
gain from the sale of timber tracts. No disclosure note was provided to explain the
event, so we can only speculate as to the circumstances leading to the company's
presentation of the gain as extraordinary.
It is important that each student actively participate in the process. Domination by
one or two individuals should be discouraged. Students should be encouraged to
contribute to the group discussion by (a) offering information on relevant issues, and (b)
clarifying or modifying ideas already expressed, or (c) suggesting alternative direction.
Suggested Grading Concepts and Grading
Communication Case 46
Scheme:
Content (70%)
_______ 10 Is the loss material?
_______ 25 Lists the alternative treatments.
______ Present before-tax amount as a separate line item.
______ Present the after-tax amount as an extraordinary item.
______ In either case, disclosure is required.
The McGraw-Hill Companies, Inc., 2013
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Case 46 (continued)
The following is provided as an example.
August 1990
TO:
Case 46 (concluded)
RECOMMENDATION
I recommend that the earthquake damage costs be treated as an extraordinary loss,
net of tax, in the income statement for the fiscal year ended August 4, 1990. In
addition, earnings per share for income both before and after the loss must be
presented. While many earthquakes do occur in California, extremely large
earthquakes causing significant amounts of damage are both unusual and infrequent. I
do not believe that this type of loss will occur again in the foreseeable future.
Ethics Case 47
Facts:
The company incurred $10 million in expenses related to a product recall. The
company had experienced product recalls in the past and they do occur in the industry.
To show a profit from continuing operations, Jim Dietz, the controller, wants to report
the $10 million as an extraordinary loss, rather than as an expense included in operating
income. He tells the CEO that the company has never had a product recall of this
magnitude and that the company fixed the design flaw and upgraded quality control.
Extraordinary items are gains and losses that are material, and result from events
that are both unusual and infrequent. These criteria must be considered in light of the
environment in which the entity operates. There obviously is a considerable degree of
subjectivity involved in the determination. The concepts of unusual and infrequent
require judgment. In making these judgments, an accountant should keep in mind the
overall objective of the income statement. The key question is how the event relates to
a firms future profitability. If it is judged that the event, because of its unusual nature
and infrequency of occurrence, is not likely to occur again, separate reporting as an
extraordinary item is warranted.
Ethical Dilemma:
It appears from the facts of the case that it would be difficult for the company to
come to the conclusion that a material product recall is not likely to occur again in the
foreseeable future. This type of event has occurred before and is common in the
industry. While a subjective judgment, extraordinary treatment of the $10 million does
not appear warranted. Is the obligation of Jim and the CEO to maximize income from
continuing operations, the company's position on the stock market, and management
bonuses stronger than their obligation to fairly present accounting information to the
users of financial statements?
Who is affected?
Solutions Manual, Vol.1, Chapter 4
Jim Dietz
CEO and other managers
Other employees
Shareholders
Potential shareholders from the stock market
Creditors
Company auditors
Research Case 48
Requirement 1
The accounting standards topic number that addresses exit or disposal cost
obligations is FASB ASC 420: Exit or Disposal Cost Obligations.
Requirement 2
The specific citation that addresses the initial measurement of these obligations is
FASB ASC 42010301: Exit or Disposal Cost ObligationsOverallInitial
Measurement.
Requirement 3
A liability for a cost associated with an exit or disposal activity is measured initially
at its fair value in the period in which the liability is incurred.
Requirement 4
The specific citation that describes the disclosure requirements for exit or disposal
obligations is FASB ASC 42010501: Exit or Disposal Cost ObligationsOverall
Disclosure.
Case 48 (concluded)
Requirement 5
All of the following information is disclosed in notes to financial statements that
include the period in which an exit or disposal activity is initiated and any subsequent
period until the activity is completed:
a. A description of the exit or disposal activity, including the facts and
circumstances leading to the expected activity and the expected completion date.
b. For each major type of cost associated with the activity (for example, one-time
employee termination benefits, contract termination costs, and other associated
costs), both of the following are disclosed:
1. The total amount expected to be incurred in connection with the activity,
the amount incurred in the period, and the cumulative amount incurred to
date.
2. A reconciliation of the beginning and ending liability balances showing
separately the changes during the period attributable to costs incurred and
charged to expense, costs paid or otherwise settled, and any adjustments
to the liability with an explanation of the reason(s) why.
c. The line item(s) in the income statement or the statement of activities in which
the costs in (b) are aggregated.
d. For each reportable segment, as defined in Subtopic 280-10, the total amount of
costs expected to be incurred in connection with the activity, the amount incurred
in the period, and the cumulative amount incurred to date, net of any adjustments
to the liability with an explanation of the reason(s) why.
e. If a liability for a cost associated with the activity is not recognized because fair
value cannot be reasonably estimated, that fact and the reasons why.
Judgment Case 49
Situation
1.
2.
3.
4.
5.
6.
7.
8.
Treatment (ag)
b.
c.
f.
g.
a.
b.
e.
d.
Financial Statement
Presentation
(CO, BC, or RE)
CO
RE
CO
CO
BC
CO
BC
RE
4.
5.
6.
Requirement 1
Requirement 2
Situations 3, 5, and 8 would be reported in the statement of income and
comprehensive income net-of-tax. Also, the net-of-tax effect of the correction of the
amortization error, situation 7, would increase or decrease retained earnings.
1 Watts, R.L., and J.L. Zimmerman, Towards a Positive Theory of the Determination of Accounting Standards, The
Accounting Review, January 1978, and Positive Accounting Theory: A Ten Year Perspective, The Accounting
Review, January 1990.
2 For example, see Healy, P.M., The Effect of Bonus Schemes on Accounting Decisions, Journal of Accounting and
Economics, April 1985, and Dhaliwal, D., G. Salamon, and E. Smith, The Effect of Owner Versus Management
Control on the Choice of Accounting Methods, Journal of Accounting and Economics, July 1982.
3 Bowen, R.M., E.W. Noreen, and J.M. Lacy, Determinants of the Corporate Decision to Capitalize Interest, Journal
of Accounting and Economics, August 1981.
Solutions Manual, Vol.1, Chapter 4
company is forbidden from paying dividends if retained earnings fall below a certain
level, for example, can affect the choice of accounting methods.
Choices made are not always those that tend to increase income. As you will learn
in Chapter 8, many companies use the LIFO inventory method because it reduces
income and therefore reduces the amount of income taxes that must be paid currently.
Also, some very large and visible companies might be reluctant to report high income
that might render them vulnerable to union demands, government regulations, or higher
taxes.
4
Research Case
Requirement 2
The authors use the S&P 500 companies as their sample.
Requirement 3
77% in 2001 and only 54% in 2003.
Requirement 4
In 2001, 85% of firms have greater pro forma than GAAP earnings. This ratio
declined to 67% in 2003.
Requirement 5
In 2001, 136 firms reported Restructuring Charges, and the same number of
firms reported a Divestiture/Sale of Business Units. In 2003, the most frequently
reported adjustment was Amortization/Impairment of Goodwill and Other
Intangibles.
Requirement 6
The authors main conclusions are that the introduction of pro forma regulation is
associated with a substantial change in firms pro forma reporting. Notably, far fewer
firms are reporting pro forma earnings, while those that continue to report appear to do
so in a manner consistent with the intention of the regulation, to provide useful
information, not to mislead.
DEFICIENCIES:
Balance Sheet:
1. The asset section of the balance sheet should be classified. Cash, short-term
investments, accounts receivable, and inventories should be included as current
assets.
4 This political cost motive is suggested by Watts, R.L.. and J.L. Zimmerman, Positive Accounting Theory: A Ten-
Year Perspective, The Accounting Review, January 1990, and Zmijewski, M., and R. Hagerman, An Income Strategy
Approach to the Positive Theory of Accounting Standard Setting/Choice, Journal of Accounting and Economics,
August 1981.
The McGraw-Hill Companies, Inc., 2013
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2.
3.
4.
5.
6.
7.
8.
9.
Income Statement:
1. The miscellaneous expense should be classified as an extraordinary item and
shown net of tax below income from continuing operations. A note should
describe the event.
2. Earnings per share disclosure is required.
3. The restructuring charges should be shown as a separate operating expense
item in the income statement and described in a note.
Requirement 1
83.9% increase
42.2% decrease
Requirement 2
Provision for income taxes Income before taxes
$715 $3,350 = 21% = Approximate income tax rate
Requirement 3
$2,635 $61,494 = 4.3%
Answers to the questions will, of course, vary
Real World Case 417because students will research financial statements of
different companies.
No specific standards dictate how income from continuing operations must be
displayed, so companies have considerable latitude in how they present the components
of income from continuing operations. This flexibility has resulted in a considerable
variety of income statement presentations. However, we can identify two general
approaches, the single-step and the multiple-step formats that might be considered the
two extremes, with the income statements of most companies falling somewhere in
between.
The presentation of separately reported items, however, is mandated and students
should be able to easily identify them.
Requirement 1
AF classifies its expenses by both natural descriptions (e.g., salaries and related
costs, taxes other than income taxes) and functions (e.g., external expenses). In the
United States, expenses are classified by function.
Requirement 2
AF classifies interest paid and interest received as operating cash flows, and
dividends received as an investing cash flow. Under IFRS, companies can report
interest paid as either an operating or financing cash flow and interest and dividends
received as either operating or investing cash flows.