1. Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material.
(a) Marcus Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income.
(b) Sosa Co. has an extraordinary gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Sosa Co.'s income for the current year was $10 million.
(c) Seliz Co. expenses all capital equipment under $25,000 on the basis that it is immaterial. The company has followed this practice for a number of years.