ly if operational profits grow by 10%.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
100%
Understand the reporting effect: If Brooke sells the stock and includes the $80,000 gain in pretax income, will she get her bonus? Assume any bonus paid to Brooke is not included in calculating pretax income.
- No, Brooke will not receive a bonus since bonuses are only paid out when operational profits grow by 10%, but this is a
capital gain on the sale of an investment or shares, thus it is not a component of operating earnings. She will receive a bonus only if operational profits grow by 10%.
Specify the options: Instead of reporting the gain as part of pretax income, how else might Brooke report the gain on the sale?
- Brooke Report this profit as a capital gain or profit on the sale of an investment; it is not included in revenue or operational profits.
Identify the impact: Does Brooke's decision to classify the gain on the sale of
- Yes, Brooke's choice has an impact on the firm since earnings have increased as a result, and shareholders have demanded higher dividends, but the fact is that this is a capital profit that cannot be distributed as a dividend.
.
Conclusion
This paragraph is where you will pull together your findings and close out the paper.
Make a decision: Should Brooke record the gain on the sale of stock as part of pretax income?
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