1. Give three examples of how management can engage in “real” earnings management to achieve the desired reporting of higher net income.
2. Profiles Corp. had the following infrequent income statement items during 2009:
$44,000 of dividends received from a stock investment
$20,000 gain on the sale of a plant asset which became outdated because of new technology
$19,000 loss due to the sale of treasury stock at a price less than its original cost
$34,000 fair value adjustment increase to market for available-for-sale investments
$50,000 interest expense for the year of which only $42,000 was actually paid
How much should Profiles report as a component of ‘income from continuing operations’?
3. On December 31, 2008, Rory Corp. acquired an 18% interest in Batson Corp. for $100,000 and appropriately applied the cost method. During 2009, Batson had net income of $200,000 and paid cash dividends of $50,000. On the last day of 2009, Rory sold one-half of its investment in Batson Corp. for $180,000. How much should Rory report on its income statement for the year ending December 31, 2009? Show your work.
4. On January 1, 2009, Parker Company leased equipment under a 3-year lease with payments of $5,000 on each December 31 of the lease term. The present value of the lease payments at a discount rate of 12% is $12,010. If the lease is considered a capital lease, depreciation expense (straight-line) and interest expense are recognized. If the lease is considered an operating lease, then rent expense is recognized. What is the difference in the total combined net incomes of 2009, 2010, and 2011, if the lease is considered a capital lease instead of an operating lease?
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