Chapter 4: Question 37Q (page 180)
How should the disposal of a component of a business be disclosed in the income statement?
Disclosure of a disposed component is based upon its nature, i.e., continued or discontinued.
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Brisky Corporation had net sales of \(2,400,000 and interest revenue of \)31,000 during 2017. Expenses for 2017 were cost of goods sold \(1,450,000, administrative expenses \)212,000, selling expenses \(280,000, and interest expense \)45,000. Brisky’s tax rate is 30%. The corporation had 100,000 shares of common stock authorized and 70,000 shares issued and outstanding during 2017. Prepare a single-step income statement for the year ended December 31, 2017.
Starr Co. had sales revenue of \(540,000 in 2017. Other items recorded during the year were:
Cost of goods sold \)330,000
Salaries and wages expense 120,000
Income tax expense 25,000
Increase in value of company reputation 15,000
Other operating expenses 10,000
Unrealized gain on value of patents 20,000
Prepare a single-step income statement for Starr for 2017. Starr has 100,000 shares of stock outstanding.
During 2017, Williamson Company changed from FIFO to weighted-average inventory pricing. Pretax income in 2016 and 2015 (Williamson’s first year of operations) under FIFO was \(160,000 and \)180,000, respectively. Pretax income using weighted-average pricing in the prior years would have been \(145,000 in 2016 and \)170,000 in 2015. In 2017, Williamson reported a pretax income (using weighted-average pricing) of $180,000. Show comparative income statements for Williamson, beginning with “Income before income tax,” as presented on the 2017 income statement. (The tax rate in all years is 30%.)
What is earnings management?
Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
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