Question

Classification of income statement and retained earnings statement items For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections:

a) Ordinary item on the income statement

b) Discontinued operations

c) Unusual item on the income statement

d) Adjustment to prior year’s retained earnings

1. The bad debt rate was increased from 1% to 2% of sales, thus increasing bad debt expense.

2. Obsolete inventory was written off. This was a material amount, and the first loss of this type in the company's history.

3. An uninsured earthquake loss was incurred. This was the first loss of this type in the company's history.

4. Recognition of revenue earned last year, inadvertently omitted from last year's income statement.

5. The company sold one of its warehouses at a loss.

6. Settlement of a court case involving the federal government, related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes.

7. A loss incurred from expropriation – the company owned resources in South America which were taken over by a dictator unsympathetic to Canadian business interests. 8. The company failed to record depreciation in the previous year.

9. Discontinuance of all production in Canada. The manufacturing operations were relocated to Honduras.

10. Loss on sale of investments. The company last sold some of its investments two years ago.

11. Loss on the disposal of a segment of the business

Answer 1

Ans-

1	The bad debt rate was increased from 1% to 2% of sales, thus increasing bad debt expense.	a) Ordinary item on the income statement
2	Obsolete inventory was written off. This was a material amount, and the first loss of this type in the company's history.	a) Ordinary item on the income statement
3	An uninsured earthquake loss was incurred. This was the first loss of this type in the company's history.	c) Unusual item on the income statement
4	Recognition of revenue earned last year, inadvertently omitted from last year's income statement.	d) Adjustment to prior year’s retained earnings
5	The company sold one of its warehouses at a loss.	a) Ordinary item on the income statement
6	Settlement of a court case involving the federal government, related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes.	a) Ordinary item on the income statement
7	A loss incurred from expropriation – the company owned resources in South America which were taken over by a dictator unsympathetic to Canadian business interests.	c) Unusual item on the income statement
8	The company failed to record depreciation in the previous year.	d) Adjustment to prior year’s retained earnings
9	Discontinuance of all production in Canada. The manufacturing operations were relocated to Honduras.	a) Ordinary item on the income statement
10	Loss on sale of investments. The company last sold some of its investments two years ago.	a) Ordinary item on the income statement
11	Loss on the disposal of a segment of the business	b) Discontinued operations

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