IFRS4-1 Explain the difference between the “nature-of-expense” and “function-of-expense” classifications.
Nature of expense method classifies expenses according to their nature based on the type of economic expenses incurred.
Function of expense method groups expenses depending upon the purpose for which these costs are incurred.
An expense refers to the cost of operations incurred for generating revenues. Employee wages, salaries, factory rent, utilities, and depreciation are some examples of expenses.
The classification of expenses by nature is associated with different categories of what the expense is in itself, such as rent expense, employee benefits expense, amortization expense etc.
On the other hand, functional classification is done on the basis of purpose, such as the type of activity associated. Administrative expenses, selling and distribution expenses, and manufacturing expenses are some types of functional classification.
During 2017, Liselotte Company reported income of $1,500,000 before income taxes and realized a gain of $450,000 on the disposal of assets related to a discontinued operation. The criteria for classification as a discontinued operation is appropriate for this sale. The income is subject to income taxation at the rate of 34%. The gain on the sale of the plant is taxed at 30%. Indicate an appropriate presentation of these items in the income statement.
Tim Mattke Company began operations in 2015 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2017, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.
Year Weighted Average FIFO
2015 $370,000 $395,000
2016 390,000 $430,000
2017 410,000 $450,000
Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2017 income statement.
Question: Below is the Retained Earnings account for the year 2017 for Acadian Corp.
Retained earnings, January 1, 2017 $257,600
Gain on sale of investments (net of tax) $41,200
Net income 84,500
Refund on litigation with government, related to
the year 2014 (net of tax) 21,600
Recognition of income earned in 2016, but omitted
from income statement in that year (net of tax) 25,400 172,700
Loss on discontinued operations (net of tax) 35,000
Write-off of goodwill (net of tax) 60,000
Cumulative effect on income of prior years in changing
from LIFO to FIFO inventory valuation in 2017 (net of tax) 23,200
Cash dividends declared 32,000 150,200
Retained earnings, December 31, 2017 $280,100
Prepare a corrected retained earnings statement. Acadian Corp. normally sells investments of the type mentioned above. FIFO inventory was used in 2017 to compute net income.
Wade Corp. has 150,000 shares of common stock outstanding. In 2017, the company reports income from continuing operations before income tax of $1,210,000. Additional transactions not considered in the $1,210,000 are as follows.
1. In 2017, Wade Corp. sold equipment for $40,000. The machine had originally cost $80,000 and had accumulated depreciation of $30,000. The gain or loss is considered non-recurring.
2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $190,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was $90,000 before taxes; the loss from disposal of the subsidiary was $100,000 before taxes.
3. An internal audit discovered that amortization of intangible assets was understated by $35,000 (net of tax) in a prior period. The amount was charged against retained earnings.
4. The company recorded a non-recurring gain of $125,000 on the condemnation of some of its property (included in the $1,210,000).
Analyze the above information and prepare an income statement for the year 2017, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)
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