Chapter 4

Question 1

P4-12

• gain from sale
• unrealized gain/losses on OCI inv
• loss on expropriation
• OCI - taxes

Answer 1

Gains are going on a IS, not a BS!

Loss on expropriation is going on an IS, not a BS! Unrealized gain or losses on OCI are separate on the IS and they go in the AOCI acc. and they are net of tax

OCI - are calculated net of tax!

If the taxes are given in the problem (not as a percentage) ; when you make the new IS, don’t forget that you might have to recalculate the taxes (by finding out what percentage was before)

Question 2

recording allowance for DA (doubtful accounts)

Answer 2

Dr. Bad Debt Expense

Cr. Allowance for DA

Allowance for DA = contra account on BS to Acc. Rec = net realizable receivable

Question 3

The single-step income statement emphasizes

Answer 3

total revenues and total expenses.

Question 4

Which of the following items is not shown in the retained earnings statement?

appropriations

expenses

Answer 4

expenses

Question 5

The modified cash basis

Answer 5

capitalizes and depreciates property, plant and equipment.

Question 6

Excess of gross profit over operating expense

Answer 6

= income from operations

Question 7

1. Net Sales - COGS
2. Gross profit - operating expenses

Non operating section (special gains/losses; unusual gain/losses; secondary activities)

3. Other revenues and Gains - other expenses and losses - income tax
4. Discontinued ops (net of tax)
   a. loss/gain from ops
   b. loss/gain o disposal

Answer 7

1. Gross profit
2. Income from operations
3. Income from cont ops
4. Net income

Question 8

Unusual gains or losses

1. material
2. not material

Answer 8

• 1. • disclosed separately in non-operating section under other gains and losses
• • included in income from cont ops.

2. they are combined with other item in the IS

Question 9

Examples of unusual gains or losses

Answer 9

• a strike is NOT an unusual event in a business settings
• a flood can be considered unusual if the company is not in an area where floods are regular
• hurricane in Caribbean is NOT

Question 10

Items reported net of tax (4)

Answer 10

1. discontinued ops
2. OCI
3. changes in accounting policy (inventory system change)
4. prior period adjustments

Question 11

Ending inventory effect

1. one year
2. two years (no correction)

Answer 11

1. undertsated - net income undertated; overstated - net income overstated

2. because the ending balance is the beginning balance of the next year, the mistake on net income/retained earnings cancels out

Question 12

Beginning inventory effect on NI/RE

Answer 12

Beg Inv understated - NI overstated

Beg Inv overstated - NI understated

Question 13

Mistated Inventory effects on NI

1. beginning
2. ending

Answer 13

1. opposite effect (same effect for COGS)
2. same effect (opposite for COGS)

Question 14

Mistated expenses effects on NI

1. understated
2. overstated

Answer 14

the opposite of the expenses: (like the beginning inventory)

1. overstated
2. understated

Question 15

EPS - under IFRS

Answer 15

basic and diluted EPS must be shown on the face of the IS

Question 16

Change in accounting estimate (P4-9) - not policy!

Answer 16

Another type of change is a change in accounting estimate which is accounted for prospectively with no
catch-up adjustment=> no prior period adjustments in RE!

Question 17

Shareholders’ equity accounts

Answer 17

Common shares
Retained earnings
Accumulated other comprehensive income

Question 18

Cumulative effect on prior years of retrospective application of new inventory costing method (net of $9,000 tax) => results in COGS higher = net income lower - journal entry

Answer 18

dr. Income Tax Receivable
dr. Retained Earnings
cr. Inventory