Classification of Income Statement and Retained Earnings Statement Items

question 14

Essay

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 or unusual (but not extraordinary) item on the income statementb. Discontinued operationsc. Extraordinary item on the income statementd. Prior period adjustment
1. The bad debt rate was increased from 1% to 2%, thus increasing bad debt expense.
2. Obsolete inventory was written off. This was the first loss of this type in the company's history.
3. An uninsured casualty loss was incurred by the company. This was the first loss of this type in the company's 50-year history.
4. Recognition of income earned last year which was inadvertently omitted from last year's income statement.
5. The company sold one of its warehouses at a loss.
6. Settlement of litigation with 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 American business).
8. The company neglected to record its depreciation in the previous year.
9. Discontinuance of all production in the United States. The manufacturing operations were relocated in Mexico.
10. Loss on sale of investments. The company last sold some of its investments two years ago.
11. Loss on the disposal of a component of a business.

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Definitions:

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