Question 1: Identify at least one situation in which application of different accounting methods or accounting estimates results in difficulties in comparing companies? Can you bring in any examples from any workplace?
Question 2: Please answer if you agree or disagree of this four points posted below, and discuss your point of view about it, and support your discussion:
a) The controller would be correct in his assessment that the company would need to report this sale in a separate income statement category as a gain or loss from the disposal of a component of a business and in addition the company reports the results of operations of a component that has been or will be disposed of separately from continued operations. The company would also show the effects of discontinued operations net of a tax as a separate category before extraordinary items.
b) The walk out by the employees would not be considered an extraordinary event because it is usual in nature and and may be expected to recur as a consequence of customary and continuing business activities.
c) If the amount is not material then the unusual gain or loss would combine these with items in the income statement.
d) A company must disclose earnings per share for all discontinued operations on either the face of the income statement or in the notes to the financial statements.
Question 3: Please answer this point like discussion and support your ideas and post very well position to convince who read this discussion, make a little bit longer like medium size.
Income reporting items) Woody Allen Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Royal Division, which manages gambling facilities. As auditor for Woody Allen Corp. you have recently overhead the following discussion between the controller and financial vice-president.
Vice President: If we sell the Casino Royal Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.
Controller: Professional pronouncements would require that we disclose this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported as an extraordinary item.
Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be an extraordinary item?.
Controller: I am not sure whether this item would be reported as extraordinary or not.
Vice President: Oh well, it doesn't make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.
Instructions:
A) On the basis of the foregoing discussion, answer the following questions: Who is correct about handling the sale? What would be the correct income statement presentation for the sale of the Casino Royale Division.
B) How should the walkout by the employees be reported?
C) What do you think about the vice-president's observation on materiality?
D) What are the earnings per share implications of these topics?
Question 4: This is the accounting problem please show your work:
(Income Statement EPS) Presented below are selected ledger accounts of Tucker Corporation as of December 31, 2007
Cash................................................ $ 50,000
Administrative Expenses........................ 100,000
Selling Expenses.................................. 80,000
Net Sales........................................... 540,000
Cost of Good Sold...................................210,000
Cash Dividends declared 2007...................20,000
Cash Dividends paid 2007..........................15,000
Discontinued Operation (loss bf.. Inc tax)....40,000
Depreciation Expense not rec.in 2006 ........ 30,000
Retained Earnings Dec. 31, 2006 .......... 90,000
Effective Tax Rate 30%..........
Instructions:
a) Compute net income for 2007
b) Prepare a partial income statement beginning with income form continuing operations before income tax, and including appropriate earnings per share information. Assume 10,000 shares of common stock were outstanding during 2007.
Question 5 (Earning management) Arthur Miller controller for the Salem Corporation, is preparing the company's income statement at year end. He notes that the company lost considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely I the past. Miller knows the losses cannot be reported as extraordinary. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets lives, the losses would not be so great. Since depreciation is included among the company's operating expenses, he wants to report the losses along with the company's expenses, where he hopes it will not be noticed.
Instructions:
(a) What are the ethical issues involved?
(b) What should Miller do?