5. Presented below are three different transactions related to materiality. Explain whether you would classify the transaction as material and why you would/would not do so.

a. A company reported a positive trend in earnings over the last 3 years. In the current year it reduces its bad debt allowance and the related bad debt expense to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income. Material/Not Material_____________________________________________________________

Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________

b. A company has an unusual gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. Management decides to net the gain and loss because the net effect is considered immaterial. The companys net income for the current year was $10 million. Material/Not Material_____________________________________________________________

Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________

c. A company expenses all capital equipment under $25,000 on the basis that it is immaterial. Management has followed this practice for a number of years. Material/Not Material_____________________________________________________________

Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________