Question

Discuss the appropriate treatment in the financial statements of each of the following. (a) Gain on sale of investment securities. (b) A profit-sharing bonus to employees computed as a percentage of net income. (c) Additional depreciation on factory machinery be- cause of an error in computing depreciation for the previous year. (d) Rent received from subletting a portion of the office space. (e) A patent infringement suit, brought 2 years ago against the company by another company, was set- tled this year by a cash payment of $725,000. (f) A reduction in the Allowance for Doubtful Accounts balance because the account appears to be consider- ably in excess of the probable loss from uncollectible receivables.

Answer 1

Answer

The appropriate treatment in the financial statements of each of the following:

A.

If marketable securities are sold for a price that is higher than their cost, the difference represents a gain on sale of marketable securities. When securities are sold at a gain, cash account is debited, marketable securities account and gain on sale of investment account are credited.

B.

Profit sharing bonus to employees computed as a percentage of net income - not extraordinary; operating expense.

Nonrecurring items can be recorded under operating expenses in the net income statement.

C.

If the amount is immaterial, it may be combined with the depreciation expense for the year and included as a part of the depreciation expense in the income statement appearing. If the amount is material it should be shown in the retained earnings statement as an adjustment tothe beginning balance of retained earnings.

D.

This should be shown in the income statement. One treatment would be to show it in the statement as a deduction from the rent expense, as it reduces an operating expense and therefore is directly related to operations. Another treatment is to show it in the other revenues and gains section of the income statement.

E.

Assuming that a provision for the loss had not been made at the time the patent infringement suit was instituted, the loss should be recognized in the current period in computing net income. It may be reported as an unusual loss.

F.

This should be reported in the income statement, but not as an extraordinary item because it relates to usual business operations of the firm.