Directions: Indicate what account is impacted and the amount of the impact. Also

Question

Directions:

Indicate what account is impacted and the amount of the impact. Also, tell where the account will be presented on the financial statement. Assume a 35% tax rate if needed.

1. An automobile dealer sells for $138,000 an extremely rare Invicta, which it purchased for $21,600 10 years ago and held as an investment. This is the only vintage automobile the dealership owns.

2. A drilling company during the current year, extended the estimated useful life of drilling equipment from 9 to 14 years. As a result, the current year depreciation was $22,840 lower than in past years.

3. A construction company, at a cost of $39,650, prepared a major proposal for a government loan. The loan is not approved.

4. A food distributor that sells wholesale to supermarket chains and to fast food restaurants decides to discontinue selling to the supermarket chains. The supermaret chains had gross operating loss of $341,456 and a book value of $197,050. There was no buyer available, so the distributor simply shut down the operations.

Explanation / Answer

Answer:

1. This sale would be treated as an extraordinary item, since it is an unusual practice for the company and is infrequent in occurrence.THIS IS SHOWN AS INCOME FROM EXTRAORDINARY ITEMS IN THE INCOME STATEMENT.

2.The depreciation expense should be based on new life. Change in estimates in the life of assets is considered ordinary even though the outcome was material.Placement on Income Statement - Changes in estimate show change only in the affected accounts. (Not shown net of tax.), and full disclosure in the notes to financial statements about the change in estimated useful life of equipment.

3.The expenses incurred in the preparation of the proposal should be treated as an unusual loss.Reported as expense in the income from operations on income statement.

4.Classified as Discontinued Operations.Placement on Income Statement discontinued operations - Show in separate section after continuing operations but before extraordinary items. (Shown net of tax.)

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