Financial Reporting and Analysis (7th Ed.)
Chapter 2 Solutions
Accrual Accounting and Income Determination
Exercises
Exercises
E2-1. Distinguishing accrual-basis revenue from cash receipts
(AICPA adapted)
Because the subscription begins with the first issue of 2018, no
E2-2. Converting from cash receipts to accrual-basis revenue
(AICPA adapted)
We first analyze the activity in the Deferred fee revenue account,
which is shown below. This account represents the liability to
Deferred Fee Revenue
$0 Beginning balance
$8,000 Ending balance
The account increased by $8,000, which is explained by $8,000
of payments received in advance of revenue being recognized.
In total, Dr. Hamilton received $200,000 from patients, so
Accounts Receivable
Beginning
Y = $199,000
E2-3. Distinguishing between accrual basis expense and cash
disbursement
(AICPA adapted)
Prepaid Insurance
Beginning
expense
E2-4. Converting from cash to accrual basis
We first determine sales revenue by analyzing Accounts receivable.
Accounts Receivable
Beginning
balance $139,000
X = $389,000
In order to determine cost of goods sold, we must analyze two
accounts – Inventory and Accounts payable. Each of these
accounts explains a portion of the difference between cash
Accounts Payable
BAP Beginning balance
Payments on
account
$131,000 X Inventory purchases
We do not know the amount of Accounts payable at either the
beginning or the end of the year, but we do know Accounts
X = $112,000
The analysis indicates that knowing the change in Accounts
payable is sufficient to determine the difference between
purchases and payments.
Inventory
Beginning
$BI + $112,000 – Y = $BI – $39,000
Y = $151,000
As was the case for Accounts payable, we do not know the
E2-5. Preparing a multiple-step income statement
Hardrock Mining Co.
Income Statement
Year Ended December 31, 2017
($ in 000)
The “Other, net” caption as originally reported is broken down as
follows:
* “Other, net” as originally reported ($ in 000)
$54,529
Less: Restructuring charge
(8,777)
Plus: Discontinued operations
12 ,000
Investment losses
$57 ,752
Discontinued operations are presented “net of tax” as calculated
below. The “restructuring loss” is infrequent, thus it is a separately
disclosed component of operating income. Removing these two
items from “Other, net” leaves only the investment losses in the
original caption, which should be relabeled “investment losses.”
The foreign currency loss ($55,000) does not surpass any
reasonable materiality threshold (e.g., greater than 1% of net
Per share disclosures are required on the face of the income
E2-6. Income statement presentation
Event 1 is a discontinued operation and would appear on the
income statement below income from continuing operations. To
qualify for discontinued operation treatment, the sold component
Event 2 would be reported as an unusual or infrequently occurring
Event 3 is also an unusual or infrequently occurring item, included in
Event 4 is a change in accounting principle and would require
presented for comparative purposes would be restated to reflect the
average cost method of inventory costing). The current year income
Event 5 is a change in accounting estimate and thus would be
included in income from continuing operations. No special income
statement disclosure of this event is required. Depreciation expense
Event 6 is an unusual on infrequently occurring item and thus would
Event 7 is an unusual or infrequently occurring item and thus would
E2-7. Determining gain (loss) from discontinued operations
Munnster Corporation
Partial Income Statement
For the Years Ended December 31
2017 2016
Operating income
$ 1,405,000
Provision for income taxes
421 ,500
Income from continuing operations 983,500 644,000
Discontinued operations:
Loss from discontinued division, net of
tax benefits of $151,500 in 2017 and
$51,000 in 2016
(353,500)
Gain from sale of discontinued division,
net of taxes of $105,000
245 ,000
Net income
$ 875 ,000
The following analysis shows how the revised income statements
E2-8. Determining loss on discontinued operations
The results of operations of an entity classified as held for sale are
to be reported in discontinued operations in the periods in which
they occur (net of tax effects). For Revsine, the loss from operations
for the discontinued segment would be $350,000 determined as
follows:
None of the expected profit from operating the discontinued
E2-9. Determining period vs. product costs
Period Cost Traceable Cost
1These are product costs; i.e. costs incurred in the manufacturing
2Rent for inventory warehousing could be argued to be a product
3Bad debt expense is typically deducted from sales to arrive at Net
4Advertising is not part of the manufacturing process and typically
5Warranty expense is matched against sales in the period in which
the products subject to warranties are sold, not when the warranty
E2-10. Change in inventory methods
Requirement 1:
Retained earnings balance at January 1,
Requirement 2:
1/1/2017 To record a change in inventory method
E2-11. Determining effect of omitting year-end adjusting entries
OS = overstated
US = understated
NE = no effect
Net
Item Assets Liabilities Income
1. Supplies Inventory
Revenue not recorded = $6,000 from July 1, 2017 to December 31, 2017
3. Gasoline Expense
Direction of effect NE US OS
Interest expense for 9 months not accrued = $50,000 x 0.12 x 9/12 = $4,500
5. Depreciation Expense
Direction of effect OS NE OS