Question 3.2 (Total: 22 marks; 2 marks each)
For each of the items listed below, indicate how it should be
treated in the financial statements. Use the following letter code
for your selections:
a. Ordinary item on the income statement
b. Discontinued operations
c. Unusual item on the income statement
d. Adjustment to prior year’s retained earnings
_____ 1. The bad debt rate was increased from 1% to 2% of
sales, thus increasing bad debt expense.
_____ 2. Obsolete inventory was written off. This was a
material amount, and the first loss of this type in the company's
history.
_____ 3. An uninsured earthquake loss was incurred. This was
the first loss of this type in the company's history.
_____ 4. Recognition of revenue earned last year,
inadvertently omitted from last year's income statement.
_____ 5. The company sold one of its warehouses at a
loss.
_____6. Settlement of a court case involving the federal
government, related to income taxes of three years ago. The company
is continually involved in various adjustments with the federal
government related to its taxes.
_____ 7. A loss incurred from expropriation – the company
owned resources in South America which were taken over by a
dictator unsympathetic to Canadian business interests.
_____ 8. The company failed to record depreciation in the
previous year.
_____ 9. Discontinuance of all production in Canada. The
manufacturing operations were relocated to Honduras.
_____ 10. Loss on sale of investments. The company last sold
some of its investments two years ago.
_____11. Loss on the disposal of a segment of the
business.