Presented below are four different transactions related to materiality. Explain whether you would classify these transactions as material. Use the four$$step approach identified in this chapter.

Blair Inc. has reported a positive trend in earnings over the past three years. In the current year, it reduces its allowance for bad debts and corresponding bad debt expense recovery to ensure another positive earnings year. The impact of this adjustment is equal to $2\%$ of net income.

Heney Limited has a gain of $$3\mathrm{.}1$ million on the sale of plant assets and a $$3\mathrm{.}3$million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Heney$$s income for the current year was $$10$ million.

Manion Corp. expenses all capital equipment under $$10,000$ on the basis that it is immaterial. The company has followed this practice for a number of years.

Sidney Inc. decided that a note payable of a very small balance should be classified as non$$current on its statement of financial position, although the maturity of the note was five months after the year end. The reason given by management was that the current ratio had to be maintained at a certain level to satisfy creditors and that the note would likely be refinanced at maturity.

E$2\mathrm{.}5($LO $3)($Elements of Financial Statements$)$The elements that are most directly related to measuring an enterprise$$s performance and financial status follow:

Assets

Expenses

Liabilities

Gains

Equity

Revenues

Losses

$$

$$

Instructions

Indicate which element is being described below. For any item that is an asset or liability, consider if the item qualifies according to the definitions under IFRS. For purposes of this exercise, consider revenues, expenses, gains, and losses separately.

Arises from peripheral or incidental transactions.

Obliges a transfer of resources because of a present, enforceable obligation.

Increases in the ownership interest through issuance of shares.

Cash dividends to owners $($declared and paid$).$

An expenditure that has future economic benefit.

Decreases in assets during the period for the payment of income taxes.

Arises from income$$generating activities that are the entity$$s ongoing major or central operations.

Is the residual interest in the enterprise$$s assets after deducting its liabilities.

Increases assets during the period through the sale of inventory.

Decreases assets during the period by purchasing the company$$s own shares.

Indicate which element listed above is being illustrated in the examples that follow.

Notes Co$.$ has a written contract to receive money from the sale of copies of future recordings of music yet to be written.

ReadyMart Inc. has inventory out on consignment at a local retailer waiting for sale to the final customer.

Music Corp. has a written contract to deliver a percentage of future music revenues $($royalties$)$ from the sale of existing recordings.