Irregular Items and Financial Statements

question 67

Essay

Irregular items and financial statements.The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the seven items listed below during the fiscal year ending December 31, 2014. Assume a tax rate of 40 percent.1. The corporation experienced an uninsured flood loss of $70,000 before taxes. While this loss meets the criteria of an extraordinary item, it has not been recorded.2. The corporation disposed of its sporting goods division during 2014. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $110,000 before taxes and a loss of $12,000 before taxes on the disposal of the division. All of these events occurred in 2014 and have not been recorded.3. The company recorded advances of $10,000 to employees made December 31, 2014 as Salaries and Wages Expense.4. Dividends of $10,000 during 2014 were recorded as an operating expense.5. In 2014, Bakersfield changed its method of accounting for inventory from the first-in-first-out method to the average cost method. Inventory in 2014 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement.6. Office equipment purchased January 1, 2014 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated three-year service life with no expected salvage value. Bakersfield uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been recorded."7. On January 1, 2010, Bakersfield bought a building that cost $85,000, had an estimated useful life of ten years, and had a salvage value of $5,000. Bakersfield uses thestraight-line depreciation method to depreciate the building. In 2014, it was estimated that the remaining useful life was eight years and the salvage value was zero. Depreciation expense reported on the 2014 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made.Part A. For each item, record corrections to income from continuing operations before taxes, if any. Denote any negative numbers by using brackets < >."

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Definitions:

Projected Dividend Payment

An estimate of the amount of money that will be paid to shareholders in the form of dividends in the future.

Expected Return

The anticipated amount of return on an investment, calculated based on probabilities of various outcomes, including gains or losses.

Indefinitely

Indefinitely means for an unspecified or unlimited duration, often indicating a period without a foreseeable end.

Last Dividend

The most recent distribution of company earnings to shareholders, expressed as a dollar per share value.