Question

The following income statement was prepared by Walters Corporation a seller of equipment for the year ended Dec-31, 2013 Walters Corporation Comprehensive Income Statement For the year ended Dec-31, 2013 Sales revenue (Note: 1)……………………………………………………………………………………... $310,000

Cost of goods sold…………………………………………………………………………………………………………..…(140,000)

Gross profit………………………………………………………………………………………………………………………. 170,000

Less: Operating Expenses. Selling and administrative expenses…………………………………………50,000

Loss on sale of Investment……………………………………………………… 15,000 (65,000)

Other income and expense Gain on sale of plant assets…………….………………………………....... 40,000

Depreciation expense……………………………………………….……..….. (15,000)

Rent Expense………………………………………………………….……..…….. (6,000)

Dividend revenue…………………………………………………………….…… 50,000

Gain on disposal of a business division (net of tax)…………………. 30,000

Loss due to earthquake (Note-2) ………………………………...………… (5,000) 94,000

Income from operations…………………………………………………………………………………..……………….. 199,000

Interest expense………………………………………………………………………………………………………………. (6,000)

Income before tax..……………………………………………………………………………………….………………….….193,000 Tax Expense………………………………………………………………………………………………………………………….(15,000)

Net Income ………………………………………………………………………………………………….………………….…..178,000

Discontinued operations Loss on operation of discontinued division (Note-3)..………………………………………………………… (10,000)

Net Income before extraordinary Item…………………………………………………………………………….168,000

Extra ordinary item Loss on Impairment of Equipment………………………………………….…2,000

Restructuring Cost…………………………………………………………………….4,000 (6,000)

Net Income after extraordinary item …………………………………………………………………………………. 162,000

Basic EPS ……………………………………………………………………….…………………………………………… $13.5/share

Diluted EPS……………………………………………………………………………………………………………..……….$ 15/share

Attributable to Non-controlling interest…………………………………..……………………………………………………….………. 40,500

Shareholders of Walters………………………………………….…………………………………………….…….…. 121,500

Explanation of Notes

Note 1: Including in the Sales

a. $ 50,000 is related to goods sent on consignment

b. $ 15,000 is related to goods sold with a buy back arrangement with restriction on the use of this equipment by Walter.

c. $ 20,000 in respect of layaway sales representing initial deposit made by customers.

d. $ 60,000 to a customer whom title has been transferred but goods are not delivered on customers ‘request.

Note 2: The loss is unexpected as this place has never experienced earthquake in past 30 years

Note-3 The tax in respect of loss on operations of discontinued division is amounting $ 2,000

Required:

i. Comment on the above Notes i.e whether things are treated properly or not;

ii. Highlight any weakness regarding the presentation or treatment of any item in the presented Comprehensive Income statement not covered in notes.

Answer 1

Answer to question

Note 1 :

The following things are included in sales

a. $ 50,000 is related to goods sent on consignment

Consignment occurs when goods are sent by the owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold. There will be a physical movement of goods to the agent, but this cannot be treated as sales. only when the agent sells this to this customer and remits the payment this can be treated as a sale.

b. $ 15,000 is related to goods sold with a buy back arrangement with restriction on the use of this equipment by Walter.

Sale with buyback agreement is a transaction wherein the seller of the goods at the time of selling goods enters into an agreement to repurchase the goods at some future date at an agreed price. This is another form of loan wherein the loan is given indirectly by buying the stock or security of the seller. genereally the repurchase price is higher than the sale price,

Sale with a buy back agreement is treated differently than an ordinary sale transaction. It is treated as a loan rather than a sale. This is due to the fact that sale means transfer of goods in exchange for a price where all the rights and ownership is transferred to the buyer of the goods. However in a sale with buy back agreement the ownership does not completely pass on to the buyer of the goods Hence this cannot be treated as a sale.

c. $ 20,000 in respect of layaway sales representing initial deposit made by customers.

Retailers routinely offer layaway sales arrangements to their customers, where customers are allowed to set aside specific items, usually in exchange for a layaway deposit. The retailer retains custody of the goods until the customer pays the remaining balance on the good.

In this case since the customer has not paid the amount, there would not be any transfer of possession of goods. Hence this cannot be treated as sales.

d. $ 60,000 to a customer whom title has been transferred but goods are not delivered on customers ‘request.

Generally sales are recognized only when there is transfer of title of goods. When the buyer get the possession of goods this can be treated as sales. Since the customer has not received the goods this cannot be treated as a sale.

Note 2: The loss is unexpected as this place has never experienced earthquake in past 30 years

When there is a natural calamity happens there are two types of losses which can happen to the business (i) loss to inventory which is used in manufacture of goods (ii) damages than can happen to your fixed asset like building and machinery.

In this case it not clear whether the damage has happened to inventory or fixed asset. Assuming that there are insurance coverage for this loss, this can has been separately shown in the financial statement. Hence this disclosure is correct

Note-3 The tax in respect of loss on operations of discontinued division is amounting $ 2,000

Discontinued operations is an accounting term that refers to parts of a company’s core business or product line that have been divested or shut down. First, the transaction to shut down the divested business will result in eliminating the operations and cash flows of the divested business from company operations.

Second, once it has been discontinued, the closed business must have no significant ongoing involvement with its operations. If these two conditions are met, then a company may report discontinued operations on its financial statements. This tax is often a future tax benefit because discontinued operations often incur losses.

Hence this disclosure is correct.

(ii) Other general weakness:

• There is no note on gain of gain on disposal of business division. And this need not be shown net off tax
• The presentation of financial statement is not shown in a sequential manner.
• Revenue recognition is not done as per the accounting standards.