Question

Hello: Can someone explain the below? I am trying to understand the below.

How does net income and assets vary for each of the below?

1) furniture company sold an unused piece of land next door to their manufacturing facilities. land was purchased for $2M years back and sold for $4M. buyer paid in cash.

2) goodwill was over valued by $25M. Company recorded the entry to adjust goodwill to current value

3) company repurchased $5M of common stock and is holding them as treasury stock

4) company split its common stock 2 for 1 (one share split to 2 shares)

5) company employees exercised 2000 vested stock options with strike price of $100 each

6) company wrote off $2M of accounts receivable.

Answer 1

1. Sale of unused piece of land:

Sale proceeds	4,000,000	Increase in Cash (Asset)
Less: Purchase Value	2000,000	Decrease in Land (Asset)
Profit on sale of Land	2000,000	Net Income

2. Goodwill is overvalued by $ 25 Million is an impairment loss. The entry is

Loss on Impairment of Goodwill a/c Dr	25000000
To Goodwill a/c		25000000

So, Loss on impairment will be written down from Net Income and Goodwill (ie asset) will be written down by 25 Million.

3. This transaction has no affect on the income statement. However, Total Equity in Balance sheet will be reduced by $ 5 Million. Correspondingly, Cash is paid to acquire the share. Hence Cash ie., asset will be written down by $ 5 Million.

4. This transaction no impact o net income and assets. Only change is that common stock will be presented as two times the number of shares and par value of share will be split by one half. Overall no change in any of balances.

5. The Income statement will be reduced by the 'Compensation Expense' every year. At exercise there are two scenarios:

• The company can pay difference between Market price on exercise date and strike price. This will reduce assets and equity.
• The company may instead issue shares. Thus there is no asset out flow. Buy equity will be impacted. Paid up capital rises and retained earnings comes down.

6. Accounts receivable written off may be treated in two ways:

• If Allowance method is used, the write offs will reduce Accounts Receivables (ie, asset) by $ 2 Million and also correspondingly reduce balance in Allowance for uncollectible accounts by the same amount. However, if sufficient balance is not available in the allowance account, the excess will be written down from net income as bad debt expense.
• If direct write off method is used, the net income is written down as bad expense by $ 2 Million and correspondingly Accounts receivables (ie asset) will be written down by same amount.