DB 46 - Classification of Income Statement Item As the audit partner of Sparky CPA's, you are in charge of reviewing the classification of unusual items that have occurred during the current year for several year-end audit clients of your firm. The following material items have come to your attention: 1. An automobile dealer sells for $150,000 an extremely rare historical vehicle that it purchased for $30,000 over 10 years ago. The vehicle is the only such display item that the dealer has owned over that time. 2. A retail outlet changed its computation for bad debt expense from 2% of sales to 1% of sales because of changes in its customer clientele. 3. A restaurant chain that has over 200 locations in over 40 states sold four restaurants located in the Midwest. 4. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 5. A construction company, at great expense, prepared a major proposal for a government loan. The loan was not approved 6. Depreciation expense last year was incorrectly understated by $800,000. The mistake was discovered in the Current year. 7. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers 8. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed Required and please read all of the requirements below before beginning with your answers): Part (a): For cach item above, indicate whether it relates to: 1) a change in accounting principle, 2) a change in accounting estimate 3) a correction of an accounting crror, or 4) none of these Part (b): Indicate if the item would be reported on the 1) Income Statement, 2) Statement of Retained Earnings, or 3) Neither Part (c): If the item would appear on the Income Statement, indicate in which section it would appear, using the following choices: 1) Sales Operating Revenue, 2) Cost of Goods Sold 3) Operating Expenses, 4) Other Unusual Items, or 5) Discontinued Operations Part (d): In order to receive full credit on this assignment, be sure to provide a brief explanation rationale related to each of your answers for the items above. Here is an example of an explanation: "This does not appear to be a normal operating expense, so since it is large material) it should be separately reported in the Other Unusual Items' section." Another example might be, 'Changes in Accounting Principle are treated retrospectively, so prior periods are re-stated for this change." Note: It probably would be best to structure your answers this way 2 ctd DB 4.6 - Classification of Income Statement Items As the audit partner of Sparky CPA's, you are in charge of reviewing the classification of unusual items that have occurred during the current year for several year-end audit clients of your firm. The following material items have come to your attention 1. An automobile dealer sells for $150,000 an extremely rare historical vehicle that it purchased for $30,000 over 10 years ago. The vehicle is the only such display item that the dealer has owned over that time. 2. A retail outlet changed its computation for bad debt expense from 2% of sales to 1% of sales because of changes in its customer clientele 3. A restaurant chain that has over 200 locations in over 40 states sold four restaurants located in the Midwest. 4. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 5. A construction company, at great expense, prepared a major proposal for a government loan. The loan was not approved. 6. Depreciation expense last year was incorrectly understated by $800,000. The mistake was discovered in the current year. 7. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers 8. A merchandising company incorrectly overstated its ending inventory 2 years ago, Inventory for all other periods is correctly computed. Plus 5 CUC Cupuicu. Required (and please read all of the requirements below before beginning with your answers): Part (a): For each item above, indicate whether it relates to: 1) a change in accounting principle, 2) a change in accounting estimate, 3) a correction of an accounting error, or 4) none of these. Part (b): Indicate if the item would be reported on the: 1) Income Statement, 2) Statement of Retained Earnings, or 3) Neither. Part (c): If the item would appear on the Income Statement, indicate in which section it would appear, using the following choices: 1) Sales (Operating) Revenue, 2) Cost of Goods Sold, 3) Operating Expenses, 4) Other/Unusual Items, or 5) Discontinued Operations. Part (d): In order to receive full credit on this assignment, be sure to provide a brief explanation/rationale related to each of your answers for the 8 items above. Here is an example of an explanation: "This does not appear to be a normal operating expense, so since it is large (material) it should be separately reported in the Other/Unusual Items' section." Another example might be, "Changes in Accounting Principle are treated retrospectively, so prior periods are re-stated for this change." Note: It probably would be best to structure your answers this way! 1b. le. Id. 2a. 2b. etc