Question

The following income statement was prepared by Walters Corporation a seller of equipment for the year ended Dec-31, 2013

Walters Corporation

Comprehensive Income Statement

For the year ended Dec-31, 2013

Sales revenue (Note: 1)……………………………………………………………………………………...             $310,000

Cost of goods sold…………………………………………………………………………………………………………..…(140,000)

Gross profit………………………………………………………………………………………………………………………. 170,000

Less: Operating Expenses.

Selling and administrative expenses…………………………………………50,000

Loss on sale of Investment……………………………………………………… 15,000                                     (65,000)

Other income and expense

Gain on sale of plant assets…………….……………………………….......    40,000

Depreciation expense……………………………………………….……..…..   (15,000)

Rent Expense………………………………………………………….……..……..    (6,000)

Dividend revenue…………………………………………………………….……    50,000

Gain on disposal of a business division (net of tax)………………….   30,000

Loss due to earthquake (Note-2) ………………………………...………… (5,000)                                     94,000

Income from operations…………………………………………………………………………………..……………….. 199,000

Interest expense……………………………………………………………………………………………………………….    (6,000)

Income before tax..……………………………………………………………………………………….………………….….193,000

Tax Expense………………………………………………………………………………………………………………………….(15,000)

Net Income ………………………………………………………………………………………………….………………….…..178,000

Discontinued operations

Loss on operation of discontinued division (Note-3)..………………………………………………………… (10,000)

Net Income before extraordinary Item…………………………………………………………………………….168,000

Extra ordinary item

Loss on Impairment of Equipment………………………………………….…2,000

Restructuring Cost…………………………………………………………………….4,000                                      (6,000)

Net Income after extraordinary item …………………………………………………………………………………. 162,000

Basic EPS ……………………………………………………………………….……………………………………………     $13.5/share

Diluted EPS……………………………………………………………………………………………………………..……….$ 15/share                  

Attributable to

Non-controlling interest…………………………………..……………………………………………………….………. 40,500

Shareholders of Walters………………………………………….…………………………………………….…….….   121,500

                                                                                                                                                                                                    

        

                                                                                                                                                                               

Explanation of Notes

Note 1: Including in the Sales

1. $ 50,000 is related to goods sent on consignment
2. $ 15,000 is related to goods sold with a buy back arrangement with restriction on the use of     this equipment by Walter.
3. $ 20,000 in respect of layaway sales representing initial deposit made by customers.
4. $ 60,000 to a customer whom title has been transferred but goods are not delivered on customers ‘request.

Note 2: The loss is unexpected as this place has never experienced earthquake in past 30 years

Note-3 The tax in respect of loss on operations of discontinued division is amounting $ 2,000

            Required:

1. Comment on the above Notes e whether things are treated properly or not;

2. Highlight any weakness regarding the presentation or treatment of any item in the presented Comprehensive Income statement not covered in notes.

Answer 1

		Comment
	Sales revenue i.e of $ 310000 includes
A	$ 50000 related to good sent on consignment basis	Consignment sale is a sale which is made on cindition that payment only be made by consignee when the good is sold by them . So it a part of sale what is questionable there is payment and it think what walter did of take this as a part of sale is correct.
B	$15000 is related to goods sold with buy back	it means that walter required to purchase it after a peeriod so it should not be a part of sale because no risk and reward has been transferred.
C	$ 20000 in respect of layaway sale initial payment made by customer	According to the accounting principal sale would be recorded as revenue only and when it is expected the sale would turn in to revenue or certain payment has been made by customer . Which is however made by the customer in this case   so the treatment made i.e include it in sale is correctt.
D	$ 60000 title transferred but good not send on customer request.	So in regard to this transaction title has transferred so the risk and reward has been transferred and delievery is behold on the request of customer only so there is or may happen to be no defualt on walter side . So inclusion of this amount in to sale is very well satisfactory.
	2 Loss due to earthquake as it is happen after a span of time it will be considered as exceptional item and it is not presented correctly here . Right treatment is under 3 Tax on loss from discont business It is not required to represent it in income statement as loss is net of tax however we can take credit of it against tax payable . The presentaion of income statement is not correct as per as per applicable FRF aas it doesnot show fair view . The statement provided under show how statement to be present so that it can be understand by the people at large it is perfectly bifurcated among income from cont. and discont. business . however EPS and Diluted EPs has shown correctly because it has to shown on the face of income statement and it may be correctly dustributed amoung NCI and shareholder amount but it is perfectly presnted. the below is the accurate presentation of Income statement. Income statement provided by walter cooperation ended 31/12/2013 Amount which is correct Comment Amount $ Sales Revenue        3,10,000.00        2,95,000.00 sale made on good on buy back agreement not be part of sale Cost on good sold       -1,40,000.00       -1,40,000.00 Gross profit        1,70,000.00        1,55,000.00 Less : Operating expenses Selling and distribution expenses          -50,000.00          -50,000.00 Rent expenses             -6,000.00             -6,000.00 Deprication expenses          -15,000.00          -15,000.00 Operating income            99,000.00            84,000.00 Non - Operating expenses and Income Loss on sale of investment          -15,000.00          -15,000.00 Gain on sale of assets            40,000.00            40,000.00 Dividend income            50,000.00            50,000.00 Gain on sale of business            30,000.00            30,000.00 Net of tax Net Profit Before Exceptional Item        2,04,000.00        1,89,000.00 Loss due to earthquake             -5,000.00             -5,000.00 Net Profit After exceptional item        1,99,000.00        1,84,000.00 Loss dur to extraordinary item             -6,000.00             -6,000.00                                                         -   Net Profit Before Interest and tax        1,93,000.00        1,78,000.00 Interest Expense             -6,000.00             -6,000.00 Net profit before tax        1,87,000.00        1,72,000.00 Tax Expense          -15,000.00          -15,000.00 Net profit after tax from cont. business        1,72,000.00        1,57,000.00 Income from Discontinuance operation          -10,000.00          -10,000.00 Net profit after tax        1,62,000.00        1,47,000.00	15