CASE 1:

Use the following information for the next six items:

Dina Magaling Co.(DMC), a servicing and a merchandising company which is subject to a tax rate of 30%
had the following transactions during the year:
 DMC reported a retained earnings balance of 150,000 at December 31, 2016. In June 2017, the
company discovered that merchandise costing 40,000 had not been included in inventory in its
year 1 financial statements.
 During 2017, DMC collected 200,000 in fees from clients. At December 31, 2016, Ward had
accounts receivable of 40,000. At December 31, 2017, Ward had accounts receivable of 60,000,
and unearned fees of 5,000.
 On January 1, 2015, the company purchased for 240,000 a machine with a useful life of ten years
and no salvage value. The machine was depreciated by the double declining balance. DMC
changed to the straight-line method on January 1, 2017. The company can justify the change.
 The company bought ten shares of securities at 1,000 on January 15, 2017. The securities are
classified as available-for-sale. The fair value of the securities increases to 1,250 per share as of
December 31, 2017. The company does not elect to use the fair value option for reporting
available-for-sale securities. Assume no dividends are paid.
 On October 1, 2017, DMC sold 100,000 gallons of heating oil to CMD at 3 per gallon. Fifty
thousand gallons were delivered on December 15, 2017, and the remaining 50,000 gallons were
delivered on January 15, 2018. Payment terms were: 50% due on October 1, 2017, 25% due on
first delivery, and the remaining 25% due on second delivery.
 On November 1, 2017, management of DMC committed to a plan to dispose of Timms Company, a
major subsidiary. The disposal meets the requirements for classification as discontinued
operations. The carrying value of Timms Company was 8,000,000 and management estimated
the fair value less costs to sell to be 6,500,000. For 2017, Timms Company had a loss of
2,000,000.

1.What amount of revenue should the company recognize from the sale of heating oil during 2017?
a. 75,000
b. 150,000
c. 225,000
d. 300,000

2. On an accrual basis, what was DMC’s service revenue for 2017?

a. 175,000
b. 180,000
c. 215,000
d. 225,000

3. How much should DMC present as loss from discontinued operations before the effect of taxes in its
income statement?
a. 0
b. 1,500,000
c. 2,000,000
d. 3,500,000

4. What amount should DMC report as adjusted beginning retained earnings in its statement of retained
earnings at December 31, 2017?
a. 190,000
b. 178,000
c. 150,000
d. 122,000

5. What should be the depreciation expense for the year ended December 31, 2017?
a. 15,360
b. 19,200
c. 24,000
d. 30,720

6. What is the amount of the holding gain arising during the period that is classified in other
comprehensive income for the period ending December 31, 2017?
a. 0
b. 1,750
c. 2,500
d. 7,500

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B. Generally, sales revenue is recognized at the date of delivery, because that generally is the time at which a sale
has occurred. At that point the two criteria for revenue recognition were met; the revenue is (1) realized or
realizable and (2) it is earned. Therefore, the amount of sales revenue recognized is 150,000 (50,000 × 3 =
150,000).
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C. 200,000 + 60,000 – 40,000 + 0 – 5,000 = 215,000
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D. In discontinued operations, presentation of the income or loss from operations of the component and the gain
or loss on disposal is required. Since the company met the requirements for “held for sale” status in 2017, the
subsidiary should be written down to its fair value less cost to sell. This would result in a loss of 1,500,000
(8,000,000 carrying amount – 6,500,000 fair value). Therefore, the loss from discontinued operations would be
3,500,000 (2,000,000 loss from operations + 1,500,000 loss on planned disposal).
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B. A correction of an error is treated as a prior period adjustment, recorded in the year the error is discovered,
And is reported in the financial statements as an adjustment to the beginning balance of retained earnings. The
adjustment is reported net of the related tax effect. In this case the net-of-tax effect is 28,000 [40,000 – (30% ×
40,000)]. This should increase beginning retained earnings because the understatement of 12/31/16 inventory
would have resulted in an overstatement of cost of goods sold and therefore an understatement of retained
earnings. Thus, the adjustment 1/1/17 retained earnings is 178,000 (150,000 + 28,000).
5
A. A change in depreciation method is a change in method that is not distinguishable from a change in estimate,
and is accounted for as a change in estimate. The change is reported on a prospective basis in the current year and
future years. Book value as of 1/1/17 = 153,600/8 years remaining = 19,200 depreciation expense in 2017.
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B. The gain for the period is 10 shares times the increase in fair value, which is 250. This gain of 2,500 must be
shown net of tax, so the holding gain is 1,750.