ACCT 5302
Handout Problem – Marcelle Company
Reporting Results of Operations
The following information was extracted from the records of Marcelle Company. Unless otherwise indicated,
the information relates to 2015 events and transactions.
1.
On August 1, 2015 Marcelle entered into a formal plan to dispose of its entertainment division. Prior to
August 1, 2015, the entertainment division qualified as a “held and used” component under FASB ASC
360 (formerly FASB Statement 144). As of August 1, 2015, this division qualifies as a component “held for
sale” under FASB ASC 360. This division represents all of Marcelle's entertainment operations.
2.
Operating revenues under method A and expenses (before income taxes) for 2015 were as follows:
Revenues
Expenses
Applicable to
entertainment division
1/1/15-7/31/15
8/1/15-12/31/15
$40,000
$21,000
50,000
36,000
Applicable to
remainder of
Marcelle's operations
$580,000
237,000
3.
The entertainment division had a book value at August 1, 2015 of $200,000 and a fair value of $175,000.
At August 1, 2015, the division’s estimated future cash flows was $220,000. At December 31, 2015,
the entertainment division has a book value of $191,000 and a fair value of $170,000. Marcelle expects to
incur a total “cost to sell” the entertainment division of $5,000.
4.
During 2015 Marcelle suffered an uninsured loss from tornado damage of $60,000 before consideration of
income taxes. The loss is fully deductible for income tax purposes. Tornadoes are considered to be
unusual and infrequent for Marcelle's region of the country.
5.
During 2015 Marcelle received proceeds of $50,000 as the final settlement of litigation that was begun in
2007. The proceeds are fully taxable.
6.
On June 1, 2015, Marcelle sold land having a book value of $55,000 for $30,000. The loss is fully
deductible for tax purposes. The sale of land by Marcelle is considered to be nonrecurring but is not
unusual for companies in the industries in which Marcelle operates.
7.
The accountant for Marcelle failed to record fines paid by Marcelle of $10,000 in each of the years 2013
and 2014. Thus, operating expenses of 2013 and 2014 are understated by $10,000 in each year.
Assume that these fines are not deductible for tax purposes; thus, there is no tax effect related to these
fines.
8.
Marcelle had no marketable securities as of January 1, 2014. Marcelle purchased securities during 2014
at a cost of $50,000. Marcelle concluded that all of these securities should be classified as available-forsale. Marcelle sold no securities in 2014. At January 1, 2015, Marcelle showed a debit balance in its
Accumulated Other Comprehensive Income account of $1,200 ($2,000 cumulative unrealized loss less
$800 tax effect). All of this balance relates to Marcelle’s marketable securities classified as available-forsale. On January 1, 2015, the cost of those securities was $50,000 and the market value was $48,000.
No securities were purchased in 2015 or 2016. At December 31, 2015, Marcelle’s securities had a market
value of $55,000. These securities were sold on January 15, 2016 for $58,000. Assume that Marcelle is
taxed only on realized gains and losses on its marketable securities and that the tax rate is the same as for
all other items of revenue, expense, gain, and loss. Marcelle had no other items at December 31, 2015 or
December 31, 2016 that would have had any impact on other comprehensive income.
9.
On January 1, 2016, Marcelle Company voluntarily decided to change its method of accounting for certain
of its revenues from method A to method B. You are to assume that both methods are acceptable
methods under U.S. GAAP. Marcelle Company made the change for tax purposes as well. The impact of
changing the method of accounting for these revenues is as follows:
Thru 2013
2014
2015
2016
Increase
(Decrease)
in Operating
Revenues
Due to Change
from Method A
to Method B
$40,000
20,000
10,000
15,000
Cumulative Effect
of Change
to January 1,
Before Tax
$40,000
60,000
70,000
Cumulative Effect
of Change
to January 1
After Tax
$24,000
36,000
42,000
The entertainment division’s reported revenue was not affected by Marcelle’s change from method A to
method B; the entire change in operating revenues due to the change from A to B related to the remainder
of Marcelle’s operations.
10. Unless indicated otherwise, all revenues and gains are fully taxable and all expenses and losses are fully
deductible for tax purposes at a tax rate of 40%. Marcelle Company had no temporary differences related
to any items included in net income during any of the years 2014-2015. The only temporary differences
related to any unrealized gains or losses (and reclassification adjustments) included in other
comprehensive income during those years.
11. Marcelle declared and paid cash dividends in $60,000 in 2010, $65,000 in 2015, and $65,000 in 2016.
12. Marcelle's 2014 financial statements issued at the end of 2014 revealed the following income and retained
earnings statement data:
Revenues under method A (including $40,000 applicable to the entertainment division)
Expenses (including $31,000 applicable to the entertainment division)
Income before income taxes
Income taxes
Net income
$440,000
210,000
230,000
92,000
$138,000
Retained earnings, January 1, 2014
Net income - 2014
Cash dividends - 2014
Retained earnings, December 31, 2014
$604,000
138,000
(60,000)
$682,000
REQUIRED:
Part A:
Using good form, prepare comparative-years' income statements for 2015 and 2014, comparative-years'
retained earnings statements for 2015 and 2014, and comparative-years’ comprehensive income
statements for 2015 and 2014. (The comprehensive income statements should be of the form that begin
with net income and end with comprehensive income.) Assume that Marcelle’s 2015 annual report
(containing the 2015 and 2014 comparative-years’ financial statements was issued on January 1, 2016.
You may omit the earnings per share data and any required footnotes.
Part B:
Using good form, prepare comparative-years' income statements for 2016 and 2015, comparative-years’
retained earnings statements for 2016 and 2015, and comparative-years’ comprehensive income
statements for 2016 and 2015. In answering Part B, you are to consider the following additional
information.
1. The entertainment division was sold on January 1, 2016 for $170,000. Marcelle incurred a total “cost to
sell” the entertainment division of $5,300.
2. Marcelle's financial records reveal the following income statement data applicable to Marcelle's 2016
continuing operations:
Operating revenues under method B
Operating expenses (excluding income taxes)
$700,000
450,000