Adjusting Balance Sheet and Income Statement for Asset Disposal On its 2019 income statement, American Airlines reported a gain of $102 million on sale of property and equipment that the company had used for the prior five years. For an accurate year by year ass we want to adjust American Airlines' financial statements for each of the past five years (including the current year). Assume that the company's tax rate is 22%. a. For the income statement effects related to the gain on asset disposal, identify with numbers the adjustments for each of the five years 2015 to 2019 for the following line items. Note: Use a negative sign to indicate if an adjustment decreases an account balance. Note: Round answers to two decimals (for example, enter 14.56 for 14.55555). 2016 Income Statement Adjustments ($ millions) Current Year Gain Adjustments: Gain on disposal (reversal) Tax expense (reversal) Net income (reversal) Allocation of Gain Adjustments: Depreciation expense Tax expense Net income (allocation) Total net income (reversal + allocation) Balance Sheet Adjustments ($ millions) Accumulated depreciation Deferred tax liability Retained Earnings $ 2015 $ $ (20.4) $ 4.49 ✔ 15.91 $ 25.46 x $ (20.4) $ 4,49 ✔ 15.91 38.19 x $ 2015 (20.4) $ 4.49 ✔ 15.91 $ 2017 2016 20.4 x $ 0x 0 x $ (20.4) $ 4.49 ✔ 15.91 ✔ 38.18 x $ b. For the balance sheet effects related to the gain on asset disposal, identify with numbers the adjustments for each of the five years 2015 to 2019 for the following line items. Note: Use a negative sign to indicate if an adjustment decreases an account balance. Note: Round answers to two decimals (for example, enter 14.56 for 14.55555). 2017 20.4 x $ 4.49 x (24.98) x $ c. What purpose is there to adjusting the income statement and balance sheet? To correct for overstated depreciation expense across years + ✓ 2018 A (20.4) ✔ 4.49 ✔ 15.91 ✔ 50.92 x $ $ 2018 20.4 x $ 4.49 X 0 x $ 2019 2019 (102) ✔ (22.44) ✔ (79.56) ✔ (20.4) ✔ 4.49 ✔ 15.91 ✔ (66.77) X 0✔ 0✓ 0✔

Cornerstones of Financial Accounting
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Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter10: Stockholder's Equity
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Adjusting Balance Sheet and Income Statement for Asset Disposal
On its 2019 income statement, American Airlines reported a gain of $102 million on sale of property and equipment that the company had used for the prior five years. For an accurate year by year assessm.
we want to adjust American Airlines' financial statements for each of the past five years (including the current year). Assume that the company's tax rate is 22%.
a. For the income statement effects related to the gain on asset disposal, identify with numbers the adjustments for each of the five years 2015 to 2019 for the following line items.
Note: Use a negative sign to indicate if an adjustment decreases an account balance.
Note: Round answers to two decimals (for example, enter 14.56 for 14.55555).
2015
2016
Income Statement Adjustments ($ millions)
Current Year Gain Adjustments:
Gain on disposal (reversal)
Tax expense (reversal)
Net income (reversal)
Allocation of Gain Adjustments:
Depreciation expense
Tax expense
Net income (allocation)
Total net income (reversal + allocation)
Balance Sheet Adjustments ($ millions)
Accumulated depreciation
Deferred tax liability
Retained Earnings
$
$ (20.4) $
4.49 ✔
15.91 ✓
25.46 * $
$
$
(20.4) ✔ $
4.49 ✔
15.91 ✔
38.19 * $
2015
(20.4) $
4.49 ✔
15.91 $
2017
2016
20.4 * $
0 x
0 x $
(20.4) ✓ $
4.49 ✔
15.91 ✓
38.18 * $
2017
20.4 * $
4.49 x
(24.98) * $
c. What purpose is there to adjusting the income statement and balance sheet?
To correct for overstated depreciation expense across years ◆
2018
b. For the balance sheet effects related to the gain on asset disposal, identify with numbers the adjustments for each of the five years 2015 to 2019 for the following line items.
Note: Use a negative sign to indicate if an adjustment decreases an account balance.
Note: Round answers to two decimals (for example, enter 14.56 for 14.55555).
(20.4) ✓
4.49 ✔
15.91 ✓
50.92 * $
2018
$
20.4 * $
4.49 x
0 x $
2019
2019
(102) ✓
(22.44) ✔
(79.56) ✔
(20.4) ✓
4.49 ✓
15.91 ✓
(66.77) *
0
0 ✓
0 ✓
Transcribed Image Text:Adjusting Balance Sheet and Income Statement for Asset Disposal On its 2019 income statement, American Airlines reported a gain of $102 million on sale of property and equipment that the company had used for the prior five years. For an accurate year by year assessm. we want to adjust American Airlines' financial statements for each of the past five years (including the current year). Assume that the company's tax rate is 22%. a. For the income statement effects related to the gain on asset disposal, identify with numbers the adjustments for each of the five years 2015 to 2019 for the following line items. Note: Use a negative sign to indicate if an adjustment decreases an account balance. Note: Round answers to two decimals (for example, enter 14.56 for 14.55555). 2015 2016 Income Statement Adjustments ($ millions) Current Year Gain Adjustments: Gain on disposal (reversal) Tax expense (reversal) Net income (reversal) Allocation of Gain Adjustments: Depreciation expense Tax expense Net income (allocation) Total net income (reversal + allocation) Balance Sheet Adjustments ($ millions) Accumulated depreciation Deferred tax liability Retained Earnings $ $ (20.4) $ 4.49 ✔ 15.91 ✓ 25.46 * $ $ $ (20.4) ✔ $ 4.49 ✔ 15.91 ✔ 38.19 * $ 2015 (20.4) $ 4.49 ✔ 15.91 $ 2017 2016 20.4 * $ 0 x 0 x $ (20.4) ✓ $ 4.49 ✔ 15.91 ✓ 38.18 * $ 2017 20.4 * $ 4.49 x (24.98) * $ c. What purpose is there to adjusting the income statement and balance sheet? To correct for overstated depreciation expense across years ◆ 2018 b. For the balance sheet effects related to the gain on asset disposal, identify with numbers the adjustments for each of the five years 2015 to 2019 for the following line items. Note: Use a negative sign to indicate if an adjustment decreases an account balance. Note: Round answers to two decimals (for example, enter 14.56 for 14.55555). (20.4) ✓ 4.49 ✔ 15.91 ✓ 50.92 * $ 2018 $ 20.4 * $ 4.49 x 0 x $ 2019 2019 (102) ✓ (22.44) ✔ (79.56) ✔ (20.4) ✓ 4.49 ✓ 15.91 ✓ (66.77) * 0 0 ✓ 0 ✓
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