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Question 17Q

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Intermediate Accounting (Kieso)
Found in: Page 180

Short Answer

Indicate the section of a multiple-step income statement in which each of the following is shown.

(a) Loss on inventory write-down.

(b) Loss from strike.

(c) Bad debt expense.

(d) Loss on disposal of a discontinued operation.

(e) Gain on sale of machinery.

(f) Interest revenue.

(g) Depreciation expense.

(h) Material write-offs of notes receivable.

The various items in the income statement are shown on the basis of their association with the operational and non-operational activities and are bifurcated accordingly.

See the step by step solution

Step by Step Solution

Meaning of Multi-Step Income Statement

As the name suggests, the multi-step income statement contains different sections. It categorizes revenues and associated expenses in operating and non-operating units for a better understanding.

Reporting of various items of the multi-step income statement

Serial No.

Section

Explanation

(a)

Extraordinary section

Loss on inventory write-down is non-recurring; hence should be shown as an extraordinary loss.

(b)

Extraordinary section

A strike is a non-operational activity; hence respective loss should be reported under the extraordinary section.

(c)

Operation section

Bad debts are part of operating activities; hence related expenses should be reported as operating expenses.

(d)

Discontinued operations section

Loss belongs to discontinued operations should be shown separately in the discontinued operation section.

(e)

Extraordinary section

Gain on sale of an asset is non-operating activity; hence the same should be reported as an extraordinary gain.

(f)

Operating section

Interest revenues are part of business operations; therefore should be reported in the operating section.

(g)

Operating section

Depreciation belongs to business operations; hence should be reported as an operating expense.

(h)

Operating section

Writing off materials linked with notes receivable are associated with business operations; hence should be reported under the operating section.

Most popular questions for Business-studies Textbooks

Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As an auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president.

Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.

Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations.

Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be subject to reporting outside operating income?

Controller: I am not sure whether this item should get special reporting or not.

Vice President: Oh well, it doesn’t make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.

Instructions

  1. On the basis of the foregoing discussion, answer the following questions. Who is correct about handling the sale? What would be the correct income statement presentation for the sale of the Casino Knights Division?
  2. How should the walkout by the employees be reported?
  3. What do you think about the vice president’s observation of materiality?
  4. What are the earnings per share implications of these topics?
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