Question

DB 46 - Classification of Income Statement Item As the audit partner of Sparky CPA's, you are in charge of reviewing the classification of unusual items that have occurred during the current year for several year-end audit clients of your firm. The following material items have come to your attention: 1. An automobile dealer sells for $150,000 an extremely rare historical vehicle that it purchased for $30,000 over 10 years ago. The vehicle is the only such display item that the dealer has owned over that time. 2. A retail outlet changed its computation for bad debt expense from 2% of sales to 1% of sales because of changes in its customer clientele. 3. A restaurant chain that has over 200 locations in over 40 states sold four restaurants located in the Midwest. 4. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 5. A construction company, at great expense, prepared a major proposal for a government loan. The loan was not approved 6. Depreciation expense last year was incorrectly understated by $800,000. The mistake was discovered in the Current year. 7. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers 8. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed Required and please read all of the requirements below before beginning with your answers): Part (a): For cach item above, indicate whether it relates to: 1) a change in accounting principle, 2) a change in accounting estimate 3) a correction of an accounting crror, or 4) none of these Part (b): Indicate if the item would be reported on the 1) Income Statement, 2) Statement of Retained Earnings, or 3) Neither Part (c): If the item would appear on the Income Statement, indicate in which section it would appear, using the following choices: 1) Sales Operating Revenue, 2) Cost of Goods Sold 3) Operating Expenses, 4) Other Unusual Items, or 5) Discontinued Operations Part (d): In order to receive full credit on this assignment, be sure to provide a brief explanation rationale related to each of your answers for the items above. Here is an example of an explanation: "This does not appear to be a normal operating expense, so since it is large material) it should be separately reported in the Other Unusual Items' section." Another example might be, 'Changes in Accounting Principle are treated retrospectively, so prior periods are re-stated for this change." Note: It probably would be best to structure your answers this way 2 ctd

Answer 1

la None of these 1b Income Statement 1c Other/Unusual Items 1d Its an extraordinary item, though the fact that it is a unique asset doesn't matter for it to be classified as unusual item. 6a Correction of an Accounting Error 6b Income Statement 6c Operating Expenses 6d Should be separately disclosed under though under above heading 2a Change in accounting estimate 2b Income Statement 2c Operating expenses 2d This is a change in accounting estimate as only measurement is changed and recognition is still under earlier principle 7a None of these 7b Income Statement 7c Discontinued Operations 7d As stopped a division which is serving a business segment. 3a None of these 3b Income Statement 3c Discontinued Operations 3d The chain has stopped its operations by selling restaurants 8a Correction of an Accounting Error 8b Income Statement 8c Operating Expenses 8d Should be separately disclosed under though under above heading 4a Change in Accounting Principle 4b Income Statement 4c Operating Expenses 4d Though it will come to same treatment as Operating Expenses, However should be separately disclosed in Notes. A change in Accounting Method is a change in Accounting Principle. 5a None of these 5b Neither 5c Not Applicable 5d No Entry for same in Books or Financials