The following transactions have been encountered in practice. Assume that all amounts are material.
a. A company decided to put the assets of one product line up for sale ( intended to be sold within eight months) because management had decided to outsource production of that product to Vietnam. The company established a plan of sale and engaged an industrial broker. The assets consisted of inventory with a carrying value of $ 40,000 and equipment with a carrying value of $ 420,000. The estimated recoverable amount was $ 30,000 for the inventory and $ 280,000 for the equipment, before deducting a 5% broker’s commission.
b. A company suffered a casualty loss (from a fire) amounting to $ 500,000. The company has had three fires in the last 10 years, but this was significantly more than any such loss experienced before by the company.
c. A company paid $ 175,000 damages assessed by the courts as a result of an injury to a customer on the company premises three years earlier.
d. A company sold a capital asset and recorded a gain of $ 70,000. The asset originally had a carrying value of $ 330,000 but had been written down to $ 300,000 in the prior year.
e. A major supplier of raw materials to a company experienced a prolonged strike. As a result, the company reported a loss of $ 150,000. This is the first such loss; however, the company has three major suppliers, and strikes are not unusual in the industry.
f. A Canadian company owns a majority of the shares of a publicly traded subsidiary in India. The shares have been held for a number of years and are viewed as long- term investments. During the past year, 10% of the shares were sold to meet an unusual cash demand. Additional disposals are not anticipated. In the process of translating the subsidiary’s financial statements from rupees to the Canadian dollar, a translation adjustment arose from exchange rate changes that occurred over the year.
For each of the foregoing transactions, explain how financial statement elements will be affected and how the results of the transactions and events should be reported in each company’s year- end financial statements.