Since the two companies share many identical transactions in the first year of business, one can overlook significant differences between Eads and Glenwood, including their inventory and depreciation methods, and specific terms related to the use of manufacturing equipment. Again, because both companies are in their first year of business, the ability to meet interest obligations carries more weight than the amount of assets provided by creditors.
Profitability and Earnings Persistence
- What are the major classifications on an income statement?
- In general, why might financial statement users be interested in a measure of persistent income?
- Define comprehensive income and discuss how it differs from net income
- The income statement reports “Sales” and “Net Sales.” What is the difference?
- Consider the income statement item “Special items, net” and information in Notes 1 and 8
- Refer to the statement of comprehensive income. What is the amount of comprehensive income in 2013? How does this amount compare to net income in
Companies like Molson Coors should deliberately disclose as much as possible on the income statement instead of hiding some items in the notes to the financial statements. What is the difference between "Other income (expenses), net" that is classified as a nonoperating expense and "Special items, net" that Molson Coors classifies as an operating expense.
Accounts Receivable
Provisions for bad and doubtful debts" and "Expected future proceeds from sales". These accounts are also called "allowance for doubtful accounts" and "allowance for sales returns and allowances". Estimated Future Sales Returns' or 'Addition for Sales Returns and Fees' serves as a provision for estimated returns. This account has a normal balance that increases with estimated sales returns and allowances and decreases with actual sales returns and allowances.
In GAAP, this contra account is commonly referred to. allowance' and reflects the expected returns from the sale of the business. Complete the T-account showing the activity in the Provisions account for sales returns during the year. Prepare the journal entries recorded by Pearson in 2009 to capture 1) estimated sales returns for 2009 and 2) the amount of actual book returns in 2009.
The amount of estimated 2009 sales returns appears on the income statement as an item that reduces gross sales.
Long-Term Contracts
Using the percentage-of-completion method, revenue, costs and gross profit are recognized as Torvill progresses toward completing their long-term contract. The ratio of estimated costs to date to estimated total costs represents the percentage of total gross profit recognized. Then, the gross profit recognized in prior years is subtracted from the total amount of gross profit recognized to find the current year's amount.
To recognize this loss and eliminate the gain from the previous year, the gross profit recognized in 2014 was subtracted from the loss in 2015 to arrive at a cumulative loss of $180,000. To record transactions for the percentage-of-completion method, Torvill must enter an entry to record construction costs, record billing progress, record receivables collection, and recognize revenue and gross profit. However, because the concluded contract method does not recognize profit until the end of the contract period, there will be no entries for revenue recognition and gross profit until the end of 2016.
At the end of 2016, when the contract is completed, Torvill will make the following entry to recognize gross profit (loss).
Property, Plant and Equipment
Palfinger's property, plant and equipment consists of the resources and machinery needed to produce its inventory. Palfinger depreciates its property, plant and equipment on a straight-line basis over the estimated useful lives of the assets. This approach is generally used if the company is unable to determine the carrying amount of the asset.
The net book value of the sales of Palfinger's tangible fixed assets in the 2007 financial year amounts to €12,298. Based on the straight-line depreciation method, the profit on the sale of the equipment in 2008 is calculated in the following table. Using the double-declining balance method, the loss on the sale of the equipment in 2008 is calculated in the following table.
Using the straight-line method of depreciation, depreciation is constant over the useful life of the asset.
Research and Development Costs
Notes to Volvo's accounts state that capitalized product and software development costs are amortized over three to eight years. See footnote 14 where Volvo reports an intangible asset to "Product and software development". Assume that the product and software development costs reported in footnote 14 are the only R&D costs that Volvo capitalizes. What is the amount of capitalized product and software development costs, net of accumulated depreciation, at the end of fiscal year 2009.
Suppose that the product and software development costs mentioned in footnote 14 are the only R&D costs that Volvo capitalizes. GAAP which requires that all research and development costs be recorded in the year in which they are incurred. Calculate the share of total research and development costs in net sales from operations (for Navistar, called net sales from manufactured products) for both companies.
Volvo's share of total research and development costs in net operating revenues is twice that of Navistar.
Data Analytics
Once Splunk is connected to a company's data network, any trained individual can work with Splunk to organize the data into an understandable visual format. These types of audits are important because they are an examination of the controls in place within a company's IT infrastructure. An IT auditor can use his or her knowledge of Splunk to evaluate the security of the company's IT infrastructure, and can therefore evaluate the effectiveness of all associated and linked applications within the company's network.
This can increase efficiency for the firm by reducing the time spent manually sifting through the large volume of data. This can increase the efficiency of the firm by providing a more tangible way to improve customer relationships. This can enable the firm to make predictions about future costs and revenues, thereby enabling them to operate more efficiently.
Finally, Splunk has the potential to improve customer relations and other quality aspects within the firm.
Long-Term Debt
According to Note 11, who has guaranteed some of Rite Aid's unsecured debt. Consider why Rite Aid has many different types of debt with a variety of interest rates. Prepare the journal entry that Rite Aid must have made when these notes were issued.
When the notes mature in 2017, Rite Aid will redeem the notes at their face value. Determine the total amount of interest expense recorded by Rite Aid on these notes for the year ended February 27, 2010. Assume that Rite Aid uses the effective interest method to account for this debt.
Based on the information above, prepare the journal entry that Rite Aid would have recorded on February 27, 2010 to calculate the interest expense on these notes.
Shareholders’ Equity
Reconcile the number of shares outstanding at December 31, 2007, with the dollar value of the common shares reported on the balance sheet. The number of common shares outstanding is calculated by subtracting the number of treasury shares held by Merck & Co. Market capitalization is calculated by multiplying the market price per share by the number of shares outstanding.
Buying treasury stock makes the stock look more valuable because there are fewer shares outstanding, and it reduces the number of weighted average shares outstanding and therefore increases earnings per share. On Merck's consolidated balance sheet, the dollar value of treasury stock is subtracted from stockholders' equity to arrive at total stockholders' equity. From note 11 to Merck's financial statements, Merck bought back 26.5 million shares on the open market in 2007.
From Note 11 to Merck's financial statements, the cost of repurchasing its stock during 2007 was $1,429.7 million.
Marketable Securities
Available-for-sale securities are debt or equity securities that are not classified as held-to-maturity or trading securities. If the market value of available-for-sale securities increased by $1 during the reporting period, what journal entry would the company record. What is the amount of net unrealized gains or losses on the available-for-sale securities held by State Street at December 31, 2012.
The amount of net unrealized gains in 2012 on the available-for-sale securities is $1,119 million. What was the amount of net realized gains (losses) from the sale of available-for-sale securities for 2012. The amount of net realized gains from the sale of available-for-sale securities for 2012 is $55 million.
Show the journal entry State Street made to record sales of available-for-sale securities for 2012.
Deferred Income Taxes
Students were challenged to analyze ZAGG's income statement, balance sheet and disclosures to trace the reported income tax provision amounts back to deferred taxes. Explain in general terms why a company reports deferred income taxes as part of its total income tax expense. A company reports deferred income taxes as part of its total income tax expense so that the company can adhere to US GAAP financial reporting standards.
Deferred tax assets should be reported separately from total income tax expense because they are subject to change and thus can influence the decisions of users of the financial statements. Deferred income tax assets and liabilities should be presented in the financial statements so that users of the financial statements can make the most useful decisions. Using the information in the first table in Note 8, show the journal entry that ZAGG recorded for the income tax provision in fiscal year 2012.
Using the information in the third table in Note 8, itemize the amount of “net deferred income taxes” recorded in the income tax journal entry in part f.
Revenue Recognition
The FASB issued new revenue recognition standards in ASC 606, which apply to revenue from contracts and. Does it seem to match the revenue recognition criteria you described in part b above? These criteria are consistent with the revenue recognition criteria described in the last section of the case, but may be slightly modified in respect of revenue related to contracts with customers.
What are multi-element contracts and why do they pose revenue recognition problems for companies? These types of contracts pose revenue recognition problems for companies because allocating revenue to the parts of the whole involves a significant amount of estimation and makes it difficult to make future predictions. The company recognizes revenue for these sales when the song is purchased by the consumer, as all four revenue recognition criteria are met.
If the products are sold online, revenue is recognized once delivery has taken place, according to the company's revenue recognition criteria which is in accordance with GAAP.
