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 Incom

The following selected information pertains to Island Company:

Cash balance, January 1, 2019

Accounts receivable, January 1, 2019
Collection from customers in 2019
Capital account balance, January 1, 2019
Total assets, January 1, 2019
Additional cash investment, July 1, 2019
Total assets, December 31, 2019
Cash balance, December 31, 2019
Accounts receivable, December 31, 2019
Withdrawals made during 2019
Total liabilities, December 31, 2019

Required:
How much net income should Island Company report in its income statement for the year
ended December 31, 2019?

Problem 11-2
Installment Sales Metho

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?

Problem 11-3
Revenue Recognitio

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?

Problem 11-4
Interest on Finance Lease Liabil

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?

Problem 11-5
Interest Income on Investment in Bon

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?

Problem 11-6
Basic and Diluted Earnings Per Share: Share Optio
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:
1. What is Columbus Company's basic earnings per share for 2019?
2. What is Columbus Company's diluted earnings per share for 2019?
ation of Net Income

$ 65,000
95,000
1,050,000
190,000
375,000
25,000
505,000
100,000
180,000
55,000
205,000

nt for the year

ment Sales Method

any for $3,000,000.

ve Georgia
$600,000 plus
032,000 on
nue recognition.

venue Recognition
 onnection with the
d the collectibility
he end of the year.

collected in full
d to be completed

s of the end of
ecember 31, all

ended December

ance Lease Liability

se contract for a
January 1, 2019.
ments have a

vestment in Bonds

with a face amount

semiannually on
Company

December 31, 2019,

are: Share Options

lumbus Company

ary share at $30