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Income_StatementMCsolutions - Income Statement 1 A material...

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Income Statement 1. A material transaction or event that is unusual and infrequent in the environment in which the entity operates is an extraordinary item. The following is the order of items to be reported in separate captions of the income statement: income from continuing operation, extraordinary items, and net income. No caption is reported for the cumulative effect of a change in accounting principle. This accounting change is applied retrospectively. 2. The cost-recovery method recognizes profit only after collections exceed the cost of the item sold, that is, when the full cost has been recovered. Subsequent amounts collected are treated entirely as revenue (debit cash and deferred gross profit, credit the receivable and realized gross profit). The sum of collections in excess of costs to be recognized as gross profit is $5,000 {[$3,000 Year 8 collections on Year 7 sales – ($8,000 cost - $7,000 Year 7 collections on Year 7 sales)] + ($12,000 collections on Year 8 sales - $9,000 cost)}. 3. In general, the retrospective application method is used to account for a change in accounting principle. However, a change in accounting estimate inseparable from (effected by) a change in principle should be accounted for as a change in estimate. A change in estimate results from new information, such as the decreasing sales resulting form the demo placements. The effect of a change in estimate should be accounted for prospectively. Thus, the effects should be recognized in the period of change and any future periods affected. Accordingly, the write-off of the $500,000 in deferred demo costs should be reported in the Year 6 income statement. Retained earnings at the beginning of the year should not be retrospectively adjusted. 4. A stock dividend or split occurring at any time must be treated as though it occurred at the beginning of the earliest period presented for purposes of computing the weighted- average number of shares. Thus, prior-period BEPS or DEPS figures presented for comparative purposes must be retroactively adjusted for the effects of a stock dividend or a stock split. After the stock, 200,000 shares (100,000 shares x 2) are deemed to have been outstanding during 20X2, and 20X2 BEPS should be reported as $1.75 ($350,000 income available to common shareholders / 200,000 shares). For 20X3, 200,000 shares are deemed to have been outstanding during the first quarter and 240,000 [(100,000 + 20,000 treasury shares sold) x 2] for the remaining 9 months, a weighted average of 230,000 {[200,000 x (3/12)] + [240,000 x (9/12)]}. Hence, the 20X3 BEPS amount is approximately $1.78 ($410,000 net income / 230,000 shares).
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5. The installment method results in periodic recognition of income as collections on installment sales are made. Income recognized equals the cash collected multiplied by the gross profit margin on the installment sale that gave rise to the receivable. The ending balance in the deferred gross profit account equals the year-end balance of installment accounts receivable times the gross profit margin on the installment sales. The installment accounts receivable have a year-end balance of $800,000 ($1,000,000 installment sales - $200,000 collections on installment sales). The gross profit margin is
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