Chapter 4 - problems

Question 1

P4-14

1. gain on recovery from insurance
2. loss on inventory due to NRV

Answer 1

• show your calculation for net of tax items (OCI!)
• calculate the tax rate in the beginning as this is the tax rate most likey (if they don’t give another %)
  1. unusual item, assuming is material
  2. unusual item and separately disclosed (if it’s infrequent)

Question 2

P4-13

• prepare an income statement for the year 2014, starting with income from continuing operations before income tax

Answer 2

that means I can have a separate schedule where I can do all the adjustments and arrive to “Inc from cont ops restated”

• A/R unlikely to be collected => that means I will have a Bad Debt exp on the income statement

Question 3

P4-9

1. disc ops inculded in expenses
2. loss on inventory due to decline in NRV included in expenses
3. change in an estimate goes on RE?

-

Answer 3

1. subtract the value of the disc ops from expenses. Usually the problem will signal an increase in tax. Then report it separately, net of tax (expenses are lower now => net income is higher but the taxes were added so the net income will be the same

17-9 = 8

$9 reported net of taxes =6 (22.4-19.4)

2. loss on inventory has to be reported separately from ordinary expenses
3. NO - only changes in policy

Question 4

Expenses by:

1. nature
2. function

Answer 4

1. type of expense (depreciation expense, insurance expense etc)
2. by business function: admin expenses; selling expenses etc

Question 5

P4-3

1. what is net of tax?
2. EPS - dics ops
3. Gain on sale of fair value-net income investments (normal, recurring)
4. something that is net of tax means…

Answer 5

1. be careful of the things that might be reported before tax and you need to report them net of tax on IS (Unrealized gain on fair value-OCI investments)

2. don’t subtract the preferred dividends from net income

3. reported in “other gains and revenues” before tax
4. the tax was already subtracted
   ex: Loss from disposal of discontinued division (net of tax of $87,500)

Question 6

Change in policy, RE statement

Answer 6

1. net income goes in RE (and is net of taxes already)
2. the result of change in policy (changing the method of depreciation) have to be reported net of tax!

Question 7

Depreciation for held for sale assets

Answer 7

no depreciaton recorded

• Remeasured at lower of carrying value and fair value net of cost to sell
• Once asset is written down, subsequent gains can be recognized only up to the amount of original loss •Presented separately on balance sheet

–Under ASPE, held for sale asset retains original classification as current or non-current

Under IFRS, held for sale assets generally classified as current

Question 8

EPS is calculated for: (3)

Answer 8

1. Earnings per share from **continuing operations **
2. Earnings per share from discontinued operations
3. Earnings per share on net income

Question 9

P4-4

1. (when it’s stated that a gain in non-taxable)
2. insured loss
3. gain from an insurance policy

Answer 9

• add the non-taxable item to the income (it depends what they ask) => this is the income for accounting and then subtract it when you need to calculate the taxes. Then, you add it back :)
  2. you don’t count for an insured loss as you get your money back
  3. that’s a gain, unless they say they did something with some of the money (ex: they invested 46) => the gain is the difference (54)

Question 10

P4-8

1. IS with expenses grouped by function

2. IS with expenses grouped by nature
3. understatement of depreciation

Answer 10

Both: calculate net sales (Sales - Discounts - returns)

1. COGS is subtracted imediately from Net Sales (it doens’t really have a function by itself)

Group together:

• Operating expenses ( salaries and wages, adv., freight-out, supplies etc)
• Admin expenses (supplies for office, depreciation of office furniture, telephone)
  2. group all revenues together (Net Sales + Div revenue)
• have raw materials and increase in work in proces (=inventoy) separate = this would have been COGS on the other statement
• all the expenses are listed completely separate
  3. an understatement of depreciation (=expense) => overstatement on NI => to correct it I need to subtract it form RE

Question 11

P4-2 (+class notes) - discontinued ops

1. calculating loss on operations (when previously it was a net income)
2. calculating loss on disposal
3. reversing 2 when the estimation of loss was higher than what actually happened

Answer 11

1. it is possible the company you want to discontinue to have had income (gain) - even if it’s before the ‘decision’ day but in the same period
   * if that’s the case you subtract the loss from the income and make sure it’s calulated only til the end of the period (7-2) *60% = income/loss on operations net of tax
2. calculate the estimated loss on disposal (if the disposal is in the future, til the end of the period - net of tax
3. reversal of write down of Assets, net of tax (the difference between what was estimated and what the actual loss was)

Question 12

Assets held for sale

1. bring it to the fair value
2. record the entry to change fair value (if it went up)
3. final sale

Answer 12

• this is how you report a part of the business that you decided to discontinue (in Assets!) on the B/S
  1. dr. Asset held for sale 49,400
  dr. Acc amort. 28,800
  dr. Loss on Assets held for sale 1,800
  cr. Equipment (asset) 80,000
  2. dr. Asset held for sale 1,800 (the value went up)
  cr. Loss on Assets 1,800 (decreasing the loss)
  3. dr. Receivables from Sale 49,600 (how much you will actually get)
  dr. Loss on assets held for sale 4,200
  cr. Asset held for sale 51,200 (the new value after the entry that change the fair value)
  cr. Comission payable 2,000
• cr. Removal Cost 600 (I don’t know why is a credit)*