Question

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.

Required:
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.



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  • CreatedFebruary 17, 2015
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