a. Manipulating accrual estimates to impact expenses.
b. Misapplications of GAAP deemed immaterial on an account by account
basis.
c. Big bath restructuring charges.
d. All of these answer choices are correct.
Answer: d
Blooms: Understand
Topic: Earnings management
[QUESTION]
90. Which of the following would not be considered a revenue recognition
abuse?
a. Recording goods on consignment as part of inventory when there is a right
of return.
b. Recording goods on layaway for a customer as a final sale.
c. Recording revenue on a large shipment to a customer whose ability to pay
is not reasonably assured.
d. Recording revenue on goods ready for delivery to the customers,
segregated in the company warehouse without a bill-and-hold arrangement in
the contract.
Answer: a
Blooms: Understand
Topic: Earnings management
91. In its accrual-basis income statement for the year ended December 31, 2018, Ralph
Company reported revenue of $2,565,000. Additional information was as follows:
Accounts receivable 12/31/17
$418,500
Uncollectible accounts written off during 2018
17,200
Accounts receivable 12/31/18
391,700
Required:
Under the cash basis of net income determination, how much should Ralph report as
revenue for 2018?
[QUESTION]
92. John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2018
Dr. Hamilton collected $220,000 in fees from his patients. At December 31, 2017, Dr.
Hamilton had accounts receivable of $30,000. At December 31, 2018 Dr. Hamilton had
accounts receivable of $35,000 and had collected deferred fee revenue of $8,000.
Required:
On the accrual basis, what was Dr. Hamilton’s patient service revenue for 2018?
93. Under Bart Company’s accounting system, all insurance premiums paid are debited
to prepaid insurance. For interim reports, Bart makes monthly estimated charges to
insurance expense with credits to prepaid insurance. Additional information for the year
ended December 31, 2018 is as follows:
$310,000
975,000
265,000
Required:
What was the total amount of insurance premiums paid by Bart during 2018?
$975,000
94. Schlegel Department Store sells gift certificates—redeemable for store
merchandise—that expire one year after their issuance. Schlegel has the following
information pertaining to its gift certificates sales and redemptions:
Unredeemed certificates at 12/31/17
$90,000
2018 sales
400,000
2018 redemptions of prior year sales
60,000
2018 redemptions of current year sales
325,000
Schlegel’s experience indicates that 10% of gift certificates will not be redeemed. The
company’s policy is to record revenue on gift certificates when they are redeemed or
expire.
Required:
In its 2018 income statement, what amount should Schlegel report as gift certificate
revenue?
2017 sales redeemed or expired in 2018
2018 gift certificate revenue
95. Lazer Industries, Inc. manufactures medical equipment parts and accessories.
Assume all amounts are pre-tax and a 30% tax rate for 2018.
Required:
Prepare a multiple-step income statement for Lazer Industries, Inc. based on the available
information for the year ended December 31, 2018. Indicate all negative numbers using
parentheses, and include all subtotals, appropriately labeled, to present your income
statement in good form.
Net sales
$1,200,000
Interest expense
$150,000
Gain on sale of discontinued operations
$400,000
Cost of goods sold
$300,000
Selling, general and administrative expenses
$170,000
Gain on sale of investments
$30,000
Restructuring charges
$20,000
Lazer Industries, Inc.
Income Statement
For the year ended December 31, 2018
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Unusual or infrequently occurring items:
Interest expense
Restructuring charges
Income from continuing operations before income tax
Income tax expense
Income from continuing operations
Discontinued operations:
Gain on sale of discontinued operations, net of tax
Net income
96. Berg, Inc. provides exotic wedding planning services. Berg’s facilities are located in
an elevated area with a dry climate. Assume all amounts are pre-tax and a 30% tax rate
for 2018.
Interest expense
$30,000
Cost of goods sold
900,000
Flood damage to facilities
60,000
Revenue
2,100,000
Office salaries expense
150,000
Advertising expense
180,000
Rent expense
100,000
Restructuring charges
80,000
Required:
Based on the available information, provide a multiple-step income statement for Berg,
Inc. for the year ended December 31, 2018. Indicate all negative numbers using
parentheses, and include all subtotals, appropriately labeled, to present your income
statement in good form.
Berg, Inc.
Income Statement
For the year ended December 31, 2018
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses:
Office salaries expense
Advertising expense
Rent expense
Interest expense
Flood damage to facilities
Restructuring charges
Income from continuing operations before income tax
Income tax expense
Net income
97. On August 1, 2018, Alpha Co. approved a plan to dispose of an unprofitable segment
of its business. Alpha expected that the sale would occur on April 30, 2019, at an
estimated gain of $250,000. The segment had actual and estimated operating profits
(losses) as follows:
Realized loss from 1/1/18 to 7/31/18
($400,000)
Realized loss from 8/1/18 to 12/31/18
(250,000)
Expected loss from 1/1/19 to 4/30/19
(300,000)
Assume Alpha’s tax rate is 30%.
Required:
In its 2018 income statement, what should Alpha report as profit or loss from
discontinued operations (net of tax effects)?
Realized loss from 1/1/18 to 7/31/18
Realized loss from 8/1/18 to 12/31/18
98. On November 15, 2018, Jones Co. sold a segment of its business for $2,750,000.
The net book value of the segment at the time of its disposal was $2,900,000. Jones had
pretax income from operations of $1,750,000 for 2018 which included $360,000
recognized by the discontinued segment prior to its disposal. Assume Jones’ tax rate is
30%.
Required:
Prepare a partial income statement for Jones Co. for 2018, beginning with pretax income
from continuing operations.
99. Delta Co. began operations on January 1, 2018. During 2018 and 2019, the company
used the weighted-average method for its inventory costing. In 2020, the company
changed its method of inventory costing to FIFO so that its financial statements would be
more comparable to those of other firms in its industry. If the FIFO method had been
used, Delta’s cost of goods sold would have been $45,000 less in 2018 and $35,000 less
in 2019. Delta’s income statements, as originally presented, appear below. Delta’s tax
rate is 30%.
2018
2019
2020
Sales
$1,000,000
$1,100,000
$1,210,000
Cost of goods sold
645,000
695,000
726,000
Gross profit
355,000
405,000
484,000
Selling, general and administrative expenses
250,000
255,000
265,000
Depreciation expense
55,000
55,000
55,000
Income before tax
50,000
95,000
164,000
Income tax expense
15,000
28,500
49,200
Net income
$35,000
$66,500
$114,800
Required:
Assume that for comparison purposes Delta presents 2018 and 2019 income statements in
its 2020 annual report. Revise Delta’s 2018 and 2019 income statements to appear as
they should in the 2020 annual report.
2018
2019
2020
Sales
$1,000,000
$1,100,000
$1,210,000
Cost of goods sold
600,000
660,000
726,000
Gross profit
400,000
440,000
484,000
Selling, general and administrative expenses
250,000
255,000
265,000
Depreciation expense
55,000
55,000
55,000
Income before taxes
95,000
130,000
164,000
Income tax expense
28,500
39,000
49,200
Net income
$66,500
$91,000
$114,800
100. An analyst gathered the following information about a company whose fiscal year
end is December 31, 2018.
Net income for the year was $23.7 million.
Preferred stock dividends of $3 million were paid for the year.
Common stock dividends of $6 million were paid for the year.
There were 10 million shares of common stock outstanding on January 1, 2018.
The company issued 6 million new shares of common stock on July 1, 2018.
The capital structure does not include any potentially dilutive securities.
Required:
Calculate the company’s basic earnings per share for 2018.
101. Primo Landscaping commenced its business on January 1, 2018. On December 31,
2018, Primo Landscaping did not record any adjusting entries with respect to the
following transactions:
a.
During the first year of its operations, Primo purchased supplies in the amount of
$10,000 (debited to “Supplies expense”), and of this amount, $3,000 were unused
as of December 31, 2018.
b.
On March 15, 2018 Primo received $36,000 for landscape maintenance services to
be rendered for 24 months (beginning July 1, 2018). This amount was credited to
“Landscaping revenue.”
c.
The company’s fuel bill for $1,300 for the month of December 2018 was not
received until January 15, 2019.
d.
The company borrowed $100,000 from First Bank on April 1, 2018 at an interest
rate of 12% per year. The principal, along with all of the interest, is due on March
30, 2019.
e.
On January 17, 2018 the company purchased a backhoe for $65,000. The backhoe
is expected to last for 10,000 hours and have no salvage value. During 2018,
Primo operated the backhoe for 500 hours.
Required:
Complete the table below, showing the effect of the omission of each year-end adjusting
entry on assets, liabilities, and net income. Use “OS” for overstated, “US” for
understated, and “NE” for no effect.
Item
Number
Effect of Omission
Assets
Liabilities
Net Income
a.
Direction of effect
Dollar amount of effect
b.
Direction of effect
Dollar amount of effect
c.
Direction of effect
Dollar amount of effect
d.
Direction of effect
Dollar amount of effect
e.
Direction of effect
Dollar amount of effect
Item
Number
a.
Direction of effect
Dollar amount of effect
b.
Direction of effect
Dollar amount of effect
d.
Direction of effect
Dollar amount of effect
e.
Direction of effect
Dollar amount of effect