Question 1
Selected financial information about income statement accounts for the Snowman Company is presented below for the year ended December 31, 2014.
Sales..........................................................$6,200,000
Cost of Goods Sold..................................$3,500,000
Administrative & Selling Expenses........$1,500,000
Several events occurred in 2014 that have not yet been reflected in the above accounts:
1. A landslide caused $75,000 in uninsured damages to a warehouse. The landslide was considered to be an infrequent event but not unusual.
2. Interest revenue in the amount of $100,000 was earned.
3. Snowman sold some property in Alaska that it had been holding for 20 years. The sale resulted in a $2 million gain. The company has no other investments in land and the transaction was considered to be both unusual and infrequent.
4. The company incurred restructuring costs of $250,000
5. Interest expense on debt totaled $150,000.
6. Equipment was sold for a loss of $40,000.
(a) For each item (1 - 6) listed above, describe the appropriate accounting treatment. For each item determine whether the entry is a part of discontinued operations, extraordinary item, unusual gain/loss, accounting change, or accounting error. Additionally, identify whether the event is a part of core operations item or non-operating item.
(b) If these events had occurred in 2016 instead of 2014, which, if any would have different accounting treatment and why?
Question 2
Panther Products bought a machine at a total cost of $105 million at the beginning of 2000. The machine was being depreciated over a 10-year life with a $5 million residual value. The balance in Accumulated Depreciation for this asset was $30 million at the end of 2002. On 1/1/2003 Panther determined the total useful life should only be a total of 6 years with no residual value. What depreciation expense will be recorded in 2003?
Question 3
Ruan's Shipping and Storage underwent a restructuring in 2003. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2003 before any adjusting entries or closing entries are prepared.
Additional printers were acquired at the beginning of 2001 and added to the company's office network. The $9,000 cost of the printers was inadvertently recorded as maintenance expense. The printers have 5 year useful lives and no material salvage value. This class of equipment should have been depreciated using the straight-line method with $1,800 of depreciation expense/year.
What entries are required to correct the error and correctly state the balances in the impacted accounts on 12/31/2003? Ignore any tax implications.
Question 4
At the beginning of 2012, Lion Company decided to change from the average cost inventory cost flow assumption to the FIFO cost flow assumption for financial reporting purposes. The following data are available in regard to Lion Company's pretax operating income and cost of goods sold.
The income tax rate is 30%. The company has a simple capital structure with 100,000 shares of common stock outstanding. The company computed its 2012 income before taxes using the newly adopted inventory cost flow method. Lion Company's 2011 and 2012 revenues were $2,500,000 and 2,800,000, respectively. Its retained earnings balances at the beginning of 2011 and 2012 (unadjusted) were $1,400,000 and $2,100,000, respectively. The company paid no dividends in any year.
(a) What is the adjustment required to Retained Earnings at the beginning of 2012 to reflect the change in accounting principle?
(b) How will Inventory be impacted as a result of this change in accounting principle?
Question 5
The following balances were taken from the books of Carry's Cranes as of December 31, 2015:
Interest revenue $120,400
Sales $1,932,000
Selling expenses $271,600
Depreciation expense on office equipment $210,000
Administrative and general expenses $135,800
Sales commissions expense $63,000
Interest expense $84,000
Loss from earthquake damage (extraordinary item) $210,000
Cost of goods sold $869,400
Assume the total effective tax rate on all items is 34%. Prepare a multiple-step income statement.