Marketing Questions

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E2-6.Converting from cash to accrual basis revenue
(AICPA adapted)

To change Dr. Hamilton’s revenue from cash basis to an accrual basis, we have to add the earned but uncollected accounts receivable and subtract the beginning accounts receivable collected in 2011 but earned in 2010. We also need to subtract fees collected in 2011 but not earned until 2012 (unearned fees on 12/31/11):

Cash basis revenue$200,000
- Beginning accounts receivable (12/31/10)(18,000)
+ Ending accounts receivable (12/31/11)25,000
- Unearned fees on 12/31/11 (8,000)
Accrual basis revenue$199,000

E2-7.Converting from accrual to cash basis expense
(AICPA adapted)
*
* The total amount of insurance premiums paid in 2011 is equal to the insurance expense for 2011 plus the ending balance in prepaid insurance and less the beginning balance in prepaid insurance. *

2011 Insurance expense$875,000
+ Ending balance in prepaid insurance 12/31/11245,000 - Beginning balance in prepaid insurance 12/31/10 (210,000) Insurance premiums paid in 2011$910,000

Alternate Solution:

The amount of premiums paid can be determined from a T-account analysis of prepaid insurance.

Prepaid Insurance
Beginning balance|
$210,000| | |
Premiums paid| X| $875,000| Amounts charged to insurance expense| Ending balance| $245,000| | |

$210,000 + X - $875,000 = $245,000
X = $875,000 + $245,000 - $210,000
X = $910,000

E2-8. Determining Gain (loss) from discontinued operations

E2-9.Determining loss on discontinued operations

Under, results of operations on an operating segment or component of an entity classified as held for sale are to be reported in discontinued operations in the periods in which they occur (net of tax effects). For Revsine, the loss from operations for the discontinued segment would be $350,000 determined as follows:

Loss from 1/1/11 to 8/31/11($300,000)
Loss from 9/1/11 to 12/31/11($200,000)
Total pre-tax loss($500,000)
Tax benefit at 30% 150,000
Operating loss, net of tax effects($350,000)

None of the expected profit from operating the segment or component for Revsine in 2012 or the estimated gain on sale is recognized in 2011. These amounts will be recognized in 2012 as they occur.

E2-14.Preparing income statement with irregular items

KEW CorporationPartial Income StatementFor the Year Ended December 31, 2011| Income from continuing operations | | |
before income taxes| $ 4,344,000**| |
Income tax expense| (1,520,400)| |
Income from continuing operations| $ 2,823,600 | |
Discontinued operations: | | |
Loss from operation of discontinued | | |
division, net of tax benefit of $227,500| (422,500)| | Loss from disposal of discontinued | | |
division, net of tax benefit of $84,000| (156,000)| | Income before extraordinary item| $ 2,245,100 | |
Extraordinary loss, net of income tax | | |
benefit of $138,250| (256,750)| |
Net income| $ 1,988,350 | |
| | |
Earnings per common share:| | |
Income from continuing operations| $ 5.65 | | Discontinued operations: | | |
Loss from operation of discontinued | | |
division| $ (0.85)| |
Loss from disposal of discontinued | | |
division| $ (0.31)| |
Income before extraordinary item | $ 4.49 | | Extraordinary loss | $ (0.51)| |
Net income| $ 3.98 | |
| |

*Cost of machinery sold during 2011| $ 300,000 |
Less: Accumulated depreciation| (225,000)|
Book...
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