Presented below are four different transactions related to materiality. Explain whether you would classify these transactions as material.
a. 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.
b. Heney Limited has a gain of $3.1 million on the sale of plant assets and a $3.3-million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Heney Limited’s income for the current year was $10 million.
c. 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.
d. 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 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.
