Question 2 Question 2 Hamad Corporation began operations on January 1, 2011. Rec

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Question 2

Question 2

Hamad Corporation began operations on January 1, 2011. Recently the corporation has had several unusual accounting problems related to the presentation of its income statement for financial reporting purposes. The company follows ASPE.

You are the CA for Hamad and have been asked to examine the following data:
HAMAD CORPORATION
Income Statement
For the Year Ended December 31, 2014 Sales $9,600,000 Cost of goods sold 5,960,000 Gross profit 3,640,000 Selling and administrative expense 1,314,000 Income before income tax 2,326,000 Income Tax Expense (40%) 930,400 Net income $1,395,600
This additional information was also provided:
1. The controller mentioned that the corporation has had difficulty collecting certain receivables. For this reason, the bad debt accrual was increased from 1% to 2% of sales revenue. The controller estimates that if this rate had been used in past periods, an additional $82,300 worth of expense would have been charged. The bad debt expense for the current period was calculated using the new rate and is part of selling and administrative expense. 2. There were 400,000 common shares outstanding at the end of 2014. No additional shares were purchased or sold in 2014. 3. The following items were not included in the income statement:
? Inventory in the amount of $112,000 was obsolete. ? The company announced plans to dispose of a recognized segment. For 2014, the segment had a loss, net of tax, of $160,000. 4. Retained earnings as at January 1, 2014, were $2.5 million. Cash dividends of $700,000 were paid in 2014. 5. In January 2014, Hamad changed its method of accounting for plant assets from the straight-line method to the diminishing balance method. The controller has prepared a schedule that shows what the depreciation expense would have been in previous periods if the diminishing balance method had been used.
Depreciation Expense under
Straight-Line Depreciation Expense under
Diminishing Balance Difference 2011 $74,000 $148,000 $74,000 2012 74,000 111,000 37,000 2013 74,000 83,250 9,250 $222,000 $342,250 $120,250 6. In 2014, Hamad discovered that in 2013 it had failed to record $10,000 as an expense for sales commissions. The sales commissions for 2013 were included in the 2014 expenses

Explanation / Answer

Sales 9600000 Less Cost of goods sold 5960000 Less Obsolete Inventory 112000 Gross Profit 3528000 Selling & Administrative expense 1314000 Retrospective Depreciation effect 120250 Income before Income Tax 2093750 Less Income tax @ 40% 837500 Total Income 1256250 Net Loss from discoutinuing operation 160000 Net Income from continuing operations 1096250 Remark :- 1) New rate of bad debt allowance is already charged in Financial Statements. No allowance would be made for retrspective effect for bad debts, as per Accounting Standards. 2) Co. has changed the accounting policy for charging depreciation from straight line to WDV from retrospective effect. 3) Charging sales commission expense for 2013 in 2014 is prior period expense. Same is correct in light of prevailing Accounting Standards but disclosure to the effect must be given in Financial statements.

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