Chapter 4: Q3Q (page 179)
Identify at least two situations in which important changes in value are not reported in the income statement.
Unrealized gains or losses on investments that are available for sale and changes in the fair values of long-term liabilities are not recognized in the income statement.
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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.
Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?
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?
Question: O’Malley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O’Malley Corporation provides you with the following income statement which O’Malley plans to submit to the bank.
O’MALLEY CORPORATION
INCOME STATEMENT
Sales revenue \(850,000
Dividends 32,300
Gain on recovery of insurance proceeds from
earthquake loss 38,500
920,800
Less:
Selling expenses \)101,100
Cost of goods sold 510,000
Advertising expense 13,700
Loss on obsolescence of inventories 34,000
Loss on discontinued operations 48,600
Administrative expense 73,400 780,800
Income before income tax 140,000
Income tax 56,000
Net income $84,000
Instructions
Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.
Question: What are the two ways that other comprehensive income may be displayed (reported)?
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