Chapter 4: 28Q (page 180)
When does tax allocation within a period become necessary? How should this allocation be handled?
Tax allocation within a period is helpful to provide the accurate results of specific transactions showing a net of all effects.
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How can information based on past transactions be used to predict future cash flows?
Roxanne Carter Corporation reported the following for 2017: net sales \(1,200,000, cost of goods sold \)750,000, selling and administrative expenses \(320,000, and an unrealized holding gain on available-for-sale securities \)18,000.
Instructions
Prepare a statement of comprehensive income, using (a) the one statement format and (b) the two statement format. (Ignore income taxes and earnings per share.)
Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?
Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As an auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president.
Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.
Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations.
Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be subject to reporting outside operating income?
Controller: I am not sure whether this item should get special reporting or not.
Vice President: Oh well, it doesn’t make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.
Instructions
Question: Below is the Retained Earnings account for the year 2017 for Acadian Corp.
Retained earnings, January 1, 2017 \(257,600
Add:
Gain on sale of investments (net of tax) \)41,200
Net income 84,500
Refund on litigation with government, related to
the year 2014 (net of tax) 21,600
Recognition of income earned in 2016, but omitted
from income statement in that year (net of tax) 25,400 172,700
430,300
Deduct:
Loss on discontinued operations (net of tax) 35,000
Write-off of goodwill (net of tax) 60,000
Cumulative effect on income of prior years in changing
from LIFO to FIFO inventory valuation in 2017 (net of tax) 23,200
Cash dividends declared 32,000 150,200
Retained earnings, December 31, 2017 $280,100
Instructions
(b) State where the items that do not appear in the corrected retained earnings statement should be shown
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