AUDIT OF OTHER INCOME

11 STATEMENT COMPONENTS
The specific objectives in the audit of operating expenses and other revenue and expenses are to
determine that:

1. Operating expenses represent all amounts incurred for period-type expenditures (revenue expenditures)
in the company's operations and are properly recorded.

2. All other revenue and expenses are properly recorded and represent unusual or infrequent transactions
(i.e., of a non-operating nature) that occurred during the current period.

3. Operating expenses and other revenue and expenses are properly described and classified, and
adequate disclosures concerning these amounts have been made.

The audit of these accounts typically includes analytical review and one or more detail test such as
analysis of accounts, vouching, cut-off test, and review of financial statement presentation and disclosures.
 11 problems
Problem 11-1
Computation of Net Income

The following selected information pertains to Island Company:

Cash balance, January 1, 2019 $ 65,000

Accounts receivable, January 1, 2019 95,000
Collection from customers in 2019 1,050,000
Capital account balance, January 1, 2019 190,000
Total assets, January 1, 2019 375,000
Additional cash investment, July 1, 2019 25,000
Total assets, December 31, 2019 505,000
Cash balance, December 31, 2019 100,000
Accounts receivable, December 31, 2019 180,000
Withdrawals made during 2019 55,000
Total liabilities, December 31, 2019 205,000

Required:
How much net income should Island Company report in its income statement for the year
ended December 31, 2019?
Total assets, December 31, 2019 $ 505,000
Total liabilities, December 31, 2019 $ (205,000)
Capital Account Balance $ 300,000

Capital account balance, January 1, 2019 $ 190,000

Additional cash investment, July 1, 2019 $ 25,000
Less : Withdrawals made during 2019 $ (55,000) 160,000
 Net Income for 2019 $ 140,000

Problem 11-2
Installment Sales Method

On January 2, 2019, Georgia Company sold a piece of equipment to Tower Company for $3,000,000.
On that date, the equipment's carrying value was $2,000,000. Tower Company gave Georgia
Company$600,000 cash and a $2,400,000 note payable in 4 annual installments of $600,000 plus
18% interest. Tower Company made the first principal and interest payment of $1,032,000 on
December 31, 2019. Georgia Company uses the installment sales method of revenue recognition.

Required:
What is the amount of realized gross income in 2019?
Selling Price $ 3,000,000
Carrying amount of the equipment $ 2,000,000
Gross Income $ 1,000,000 = 33.33%

Downpayment $ 600,000
Principal Collection $ 600,000
$ 1,200,000
Multiply by Gross Income rate 33.33%
Realized Gross Income $ 400,000

Problem 11-3
Revenue Recognition

Described below are Ethiopia Company's sales for the year ended December 31, 2019:

a. A sale for $300,000 was made on April 3. As of the reporting date, all work in connection with the
sale has been completed. However, the customer is a significant credit risk and the collectibility
of the cash for the sale is highly uncertain. Nocollection has been made as of the end of the year.
b. A sale for $390,000 was made on July 28. The $390,000 cash for the sale was collected in full
on July 28. The work associated with the sale has not yet begun but is expected to be completed
early in the upcoming year.

c. A sale for $510,000 was made on November 21. No cash has been collected as of the end of
the year, but all of the cash is expected to be collected early next year. As of December 31, all
of the work associated with the sale has been completed.

Required:
How much revenue should be recognized by Ethiopia Company for the year ended December
31, 2019?
Total Earned Revenue 12/31/2019 $ 510,000

Problem 11-4
Interest on Finance Lease Liability

On January 1, 2019, Malacca Company entered into a 10-year noncancellable lease contract for a
machine stipulating annual payments of $40,000. The first payment was made on January 1, 2019.
This transaction was appropriately treated as a finance lease. The ten annual payments have a
present value of $270,000 at January 1, 2019 based on implicit interest rate of 10%.

Required:
What is the amount of interest expense for the year ended December 31, 2019?
Interest Expense (230,000 x 10%) $ 23,000
[270,000-40,000 = 230,000]

Problem 11-5
Interest Income on Investment in Bonds

On July 1, 2019, Lisbon Company purchased Malay Company 10-year, 8% bonds with a face amount
of $1,000,000 for $840,000. The bonds mature on June 30, 2024 and pay interest semiannually on
June 30 and December 31. For the six months ended December 31, 2019, Lisbon Company
recorded bond discount amortization of $3,600 using the effective interest method.

Required:
What is the amount of interest income to be recognized for the year ended December 31, 2019,
from this long-term investment?
Nominal Interest (1,000,000 x 8% x 6/12) $ 40,000
Amortization of discount $ 3,600
Total interest Income $ 43,600

Problem 11-6
Basic and Diluted Earnings Per Share: Share Options

The following information was obtained from the audited financial statements of Columbus Company
for the year ended December 31, 2019:

Operating income $ 3,500,000

Selling, administrative, and other operating expenses 1,800,000
Finance cost 250,000
10% Nonconvertible bonds 2,500,000
Income tax rate 30%

Additional data:
a. There were 35,000 ordinary shares outstanding throughout the year.
b. On Januaryn1, 2019, there were options outstanding to purchase 20,000 ordinary share at $30
per share. The average market price during the year was $40 per share.

Required:
Operating income 3,500,000
Selling, administrative, and other operating expenses (1,800,000)
Finance cost (250,000)
 Net Income Before income tax 1,450,000
Less: Income Tax (1,450,000 x 30%) (435,000)
Net Income after income tax 1,015,000

1. What is Columbus Company's basic earnings per share for 2019?

Net Income after income tax 1,015,000
Ordinary Shares 35,000
Basic Earnings per share 29

2. What is Columbus Company's diluted earnings per share for 2019?

Net Income after income tax 1,015,000
Ordinary Shares 35,000
Shares from conversion 20,000 55,000
Diluted Earnings per share 18.45