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Chapter 4: Question 18Q (page 180)

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?

Short Answer

Expert verified

No, both the business concerns are required to treat gain on sale of land in a different manner.

Step by step solution

01

Meaning of Business Concern

The term business concern refers to an entity established to generate revenues. It is a must for a business concern to perform ethical commercial activities such as selling and purchasing products or services.

02

Treatment of gain on sale of land

According to the given scenario, the gain will remain the same for Perlman Land Development and Sheehan Manufacturing, but recording such a gain would be different.

As purchase and sale of land are the operating activity for the Perlman Land Development, the gain will be considered operating profit.

On the other hand, gain on land sale is non-operating; hence, it should be considered an extraordinary gain.

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Most popular questions from this chapter

Question: Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the company’s financial statements at year-end. Currently, he is focusing on the income statement and determining the format for reporting comprehensive income. During the year, the company earned net income of \(400,000 and had unrealized gains on available-for-sale securities of \)15,000. In the previous year, net income was $410,000, and the company had no unrealized gains or losses.

Instructions

(a) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the two statement format.

(b) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the one statement format.

(c) Which format should Nelson recommend?

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

How should the disposal of a component of a business be disclosed in the income statement?

Maher Inc. reported income from continuing operations before taxes during 2017 of \(790,000. Additional transactions occurring in 2017 but not considered in the \)790,000 are as follows.

  1. The corporation experienced an uninsured flood loss in the amount of \(90,000 during the year.
  2. 2. At the beginning of 2015, the corporation purchased a machine for \)54,000 (salvage value of \(9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2015, 2016, and 2017, but failed to deduct the salvage value in computing the depreciation base.
  3. Sale of securities held as a part of its portfolio resulted in a loss of \)57,000 (pretax).
  4. When its president died, the corporation realized \(150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of \)46,000 (the gain is nontaxable).
  5. The corporation disposed of its recreational division at a loss of \(115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations.
  6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2015 income by \)60,000 and decrease 2016 income by $20,000 before taxes. The FIFO method has been used for 2017. The tax rate on these items is 40%.

Instructions

Prepare an income statement for the year 2017 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

Linus Paper Company decided to close two small pulp mills in Conway, New Hampshire, and Corvallis, Oregon. These two closings do not represent a major shift in strategy for the company. Would these closings be reported in a separate section entitled “Discontinued operations after income from continuing operations”? Discuss.
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