Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 9-6

Item 1: Sale of an inventory item:

The sale of inventory is Houston's main line of business. The $10,000 sales price is included in sales revenue on the income statement. The cost, $5,200, is included in cost of goods sold. Therefore, this transaction causes $4,800 to be reflected in the gross profit figure for the period. The $400 commission is reported as a selling expense (operating expense) on the income statement. The net impact is a $4,400 increase in the net income amount for the period.

Item 2: Sale of a plant asset:

The sale of a plant asset is incidental to the main focus of Houston's business (to sell goods to customers). Therefore, the $10,000 sales price, $5,200 book value, and $400 commission are all netted off of the income statement; one line item, a gain of $4,400, is reported in the Other Revenues and Gains section of the income statement.

TIP: Notice both transactions have the same net impact on net income.