87
PROBLEM 4-13
a. 1.
Receipt of cash:
Sales, 210,000 ounces x $300
=
$
63,000,000
Cost of goods sold (1),
210,000 ounces x $250
=
(52,500,000)
Gross profit
$
10,500,000
Selling expenses
(2,000,000)
Administrative expenses
(1,250,000)
Profit before taxes
$
7,250,000
Taxes
(3,625,000)
Net income
$
3,625,000
(1)
$50,000,000
=
$250 ounce
200,000
2.
Point of sale:
Sales, 230,000 ounces x $300
=
$
69,000,000
Cost of goods sold,
230,000 ounces x $250
=
57,500,000
Gross profit
$
11,500,000
Selling expenses
(2,000,000)
Administrative expenses
(1,250,000)
Profit before taxes
$
8,250,000
Taxes
(4,125,000)
Net income
$
4,125,000
3.
End of production:
Sales, 200,000 ounces x $300
=
$
60,000,000
Cost of goods sold,
200,000 ounces x $250
=
(50,000,000)
Gross profit
$
10,000,000
Selling expenses
(2,000,000)
Administrative expenses
(1,250,000)
Profit before taxes
$
6,750,000
Taxes
(3,375,000)
Net income
$
3,375,000
88
4.
Based on delivery:
Sales, 190,000 ounces x $300
=
$
57,000,000
Cost of goods sold,
190,000 ounces x $250
=
(47,500,000)
Gross profit
$
9,500,000
Selling expenses
(2,000,000)
Administrative expenses
(1,250,000)
Profit before taxes
$
6,250,000
Taxes
(3,125,000)
Net income
$
3,125,000
b. 1. Receipt of cash
2. Point of sale
In practice, the point of realization usually is the point of sale. At this point, the
3. End of production
The realization of revenue at the completion of the production process is
acceptable when the price of the item is known and there is a ready market.
This method should receive strong consideration in this case. The question
4. Based on delivery
This is not usually an acceptable realization point. Delivery is an objective
guideline, but delivery does not usually represent a significant event.
89
PROBLEM 4-14
a. No. This loss does not relate to the cost of goods sold. It is likely an
b. No. Land is carried at historical cost.
c. Yes. The cost of machinery and equipment should be charged to a fixed asset
d. No. Depreciation should be recognized over the useful life of the asset.
PROBLEM 4-15
a. Comprehensive income will tend to be more volatile than net income because the
b. The standard directs that earnings per share be computed based on net income.
net income.
90
PROBLEM 4-16
a.
2
Advertising expense would be classified as an operating expense.
b.
2
Equity in earnings of nonconsolidated subsidiaries would be recurring as
long as there is an investment in the subsidiary. If our firm gained control,
then there would be consolidation.
c.
2
Beginning inventory
$
65,000
Computed
Purchases
$
180,000
Purchase returns
(5,000)
175,000
Total available
240,000
Computed
Less ending inventory
(30,000)
Cost of goods sold
$
210,000
d.
3, 4, 5
Discontinued operations and extraordinary items are considered to be
nonrecurring items.
e.
3
30% x $150,000 = $45,000
f.
1
Extraordinary items are material events and transactions distinguished by
their unusual nature and by the infrequency of their occurrence. A loss
from a tornado would qualify as an extraordinary item.
g.
2
A cash dividend declared by the board of directors reduces retained
earnings by the amount of the dividend declared.
h.
5
The overall effect is to leave stockholders’ equity in total unchanged and
each owner’s share of stockholders’ equity unchanged; however, the total
number of shares increase.
91
PROBLEM 4-17
a.
2
Beginning inventory
$
80,000
Purchases
580,000
Purchase returns
(8,000)
Total available
652,000
Less ending inventory
(132,000)
Computed
Cost of goods sold
$
520,000
b.
4
Assets increase
$
400,000
The increase in assets is equal to the change in liabilities and
stockholders’ equity.
Liabilities increase
$
150,000
Capital stock increases
120,000
Additional paid-in capital
increases
110,000
Therefore, increase in
retained earnings
20,000
$
400,000
Decrease to retained earnings
related to dividends
$
20,000
Net increase to retained
earnings
20,000
Therefore, net income was
$
40,000
c.
5
An extraordinary item is a material event or transaction distinguished by
unusual nature and by infrequency of occurrence.
d.
1
If a firm consolidates subsidiaries not wholly owned, the total revenues
and expenses of the subsidiaries area included with those of the parent.
However, to determine the income that would accrue to the parent, it is
necessary to deduct the portion of income that would belong to the
minority owners.
e.
2
An adjustment for an error of the current period is adjusted during the
current period.
f.
2
2,000,000 x .05% = 100,000 x $10 = $1,000,000
g.
3
100,000 x .05% = 5,000 x $10 = 50,000
h.
2
200,000 x 2 = 400,000
i.
5
Extraordinary items are not part of accumulated other comprehensive
income.
92
CASES
CASE 4-1 HOMEBUILDERS
(This case provides a good review of the income statement).
a. Modified single-step income statement.
c. No. Equity income would be presented. This would represent the same amount
of income.
e. The decline in 2010 of valuation adjustments and write-offs of option deposits
93
CASE 4-2 COMMUNICATION PRODUCTS
(This case provides an opportunity to review a split-off, name change and reverse stock
split).
a. Motorola Inc. split off part of its company to a new separate company called
b. Motorola Inc. changed its name to “Motorola Solutions.”
d. They wanted to increase the market price of a single share. This indicates the
CASE 4-3 APPAREL COMPANIES
(This case represents a selected review of the income statement).
2. No. Noncontrolling interest is present (minority interest).
c. No. Not if they were classified under current assets.
94
CASE 4-4 THE BIG ORDER
a. United Airlines should record the purchase of these planes when a plane is
delivered.
b. In general, revenue recognition is being made at the completion of production.
Under summary of significant accounting policies in the notes to the 1990
financial statements, Boeing describes its revenue recognition with this
statement.
“Sales under commercial programs and U.S. Government and foreign military
fixed-price type contracts are generally recorded as deliveries are made.”
c. The case indicates that the order was equally split between firm orders and
options. This would lead us to believe that the firm orders were “firm” and that
United Airlines would be committed to accept delivery of these planes.
In reality, the orders may not be firm in the sense that Boeing may be willing to
negotiate a reduction if United Airlines were in financial trouble or if the need for
the planes had substantially declined.
In the 1990 annual report of Boeing, in the section Management’s Discussion
and Analysis of Financial Condition and Results of Operations, a section on
backlog had this comment:
“In evaluating the Company’s firm backlog for commercial customers, certain risk
factors should be considered. Approximately 55% of the firm backlog for
commercial airplanes is scheduled to be delivered beyond 1992. An extended
economic downturn could result in less than currently anticipated airline
equipment requirements resulting in requests to negotiate the rescheduling, or
possible cancellation, of firm orders.”
d. 1. There would not necessarily be disclosure in the financial statements and
notes. This was not a transaction that was recorded.
There was disclosure of credit agreements in a note “long–term debt.” This
note did not specifically refer to this order.
2. Disclosure would likely be found in the president’s letter and the section
Management’s Discussion and Analysis. In fact, extensive disclosure was
located in these sections.
e. 1. There would not necessarily be disclosure in the financial statements and
notes. This was not a transaction that was recorded. A review of the
financial statements and notes did not turn up disclosure.
2. Disclosure would likely be found in the president’s letter and the section
Management’s Discussion and Analysis. In fact, extensive disclosure
relating to orders was found. Some of this disclosure specifically
commented on the United Airlines order, while some was general on orders.
95
CASE 4-5 CELTICS
(This case provides the opportunity to review the statements of income of the Boston
Celtics.)
a. Franchise and other intangible assets were recognized as intangible assets on
the balance sheet.
b. No. Since these operations were discontinued they would not be included in
projecting the future.
c. Possibly there was a new contract with players that called for substantial
increases.
d. Revenues from ticket sales and television and radio broadcast rights fee
increased substantially between 1997 and 1998.
e. Much of the income in 1996 came from discontinued operations. The board
would typically not want to consider the income from discontinued operations
when setting the distribution.
CASE 4-6 HOMEBUILDING
(This case provides a view of impairments and early retirement of debt.)
a. No. Inventory includes such things as construction in progress, finished homes,
residential land and lots developed and under development, and land held for
development, based on the stage of production or plans for future development.
b. This implies that D. R. Horton invested in a subsidiary in the past for a sum
greater than the physical asset value. It now estimates that it will not recover
some or all of the cost that were greater than the physical asset value.
c. They have substantial cash flow and limited opportunities to use the cash. The
interest rate on the debt would also be a factor.
CASE 4-7 TELECOMMUNICATIONS – PART 2
(This case provides the opportunity to review a Hong Kong company presentation of
Consolidated Statements of Income.)
2. The note reference is different than for U.S. GAAP. U.S. GAAP does have some
note reference within the statement.