Question

completed work in Excel format.

CA4.6 (LO 2, 3, 4, 5) Ethics (Classification of Income Statement Items) As audit partner for Grupo and Rijo, you are in charge of reviewing the classification of unusual items that have occurred during the current year. The following material items have come to your attention. 1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed. 2. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased for $21,000 10 years ago. The Invicta is the only such display item the dealer owns. 3. A drilling company during the current year extended the estimated useful life of certain drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered. 4. A retail outlet changed its computation for bad debt expense from 1% to 1/2 of 1% of receivables because of changes in its customer clientele. 5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries. 6. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved. 8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year. 9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year. 10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years. 11. 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. This represents a strategic shift in the company business.

Answer 1

Answer:-

	Classification	Rationale
1.	No disclosure.	Error has “washed out”; that is, subsequent income statement compensated for the error. However, prior year income statements should be restated.
2.	Extraordinary item section.	Material, unusual in nature, and infrequent in occurrence.
3.	Depreciation expense in body of income statement, based on new useful life.	Material item, but change in estimated useful life is considered part of normal business activity.
4.	No separate disclosure unless material.	Change in estimate, considered part of normal business activity.
5.	Reported in body of the income statement, possibly as an unusual item.	Sale does not meet criteria for either the disposal of a component of the business or an extraordinary item.
6.	Adjustment to the beginning balance of retained earnings.	A change in inventory methods is a change in accounting principle and prior periods are adjusted.
7.	Reported in body of the income statement, possibly as an unusual item.	Loss on preparation of such proposals is not considered extraordinary in nature.
8.	Reported in body of the income statement, possibly as an unusual item.	Strikes are not considered extraordinary in nature.
9.	Prior period adjustment, adjust beginning retained earnings.	Corrections of errors are shown as prior period adjustments.
10.	Extraordinary item section.	Material, unusual in nature, and infrequent in occurrence.
11.	Discontinued operations section.	Division’s assets, results of operations, and activities are clearly distinguishable physically, operationally, and for financial reporting purposes.