Ch 6. Questions for Review and Discussion
6. How should governments report their capital projects and debt service activities in their government-wide statements?
Click here for the solution: How should governments report their capital projects and debt service activities in their government-wide statements?
Monday, April 18, 2016
Lane & Goble Bookstore has a liberal return policy
E8-13 – Identifying and correcting an internal control weakness
Lane & Goble Bookstore has a liberal return policy. A customer can return any product for a full refund within 30 days of purchase. When a customer returns merchandise, Lane & Goble policy specifies:
• Store clerk issues a prenumbered return slip and refunds cash from the cash register. Keep a copy of the return slip for review by the manager.
• Store clerk places the returned goods back on the shelf as soon as possible. Lane & Goble uses a perpetual inventory system.
1. How can a dishonest store clerk steal from Lane & Goble? What part of company policy enables the store clerk to steal without getting caught?
2. How can Lane & Goble improve its internal controls to prevent this theft?
Click here for the solution: Lane & Goble Bookstore has a liberal return policy
Lane & Goble Bookstore has a liberal return policy. A customer can return any product for a full refund within 30 days of purchase. When a customer returns merchandise, Lane & Goble policy specifies:
• Store clerk issues a prenumbered return slip and refunds cash from the cash register. Keep a copy of the return slip for review by the manager.
• Store clerk places the returned goods back on the shelf as soon as possible. Lane & Goble uses a perpetual inventory system.
1. How can a dishonest store clerk steal from Lane & Goble? What part of company policy enables the store clerk to steal without getting caught?
2. How can Lane & Goble improve its internal controls to prevent this theft?
Click here for the solution: Lane & Goble Bookstore has a liberal return policy
William County opted to account for its duplication service center in an internal service fund
Government and Not-for-Profit Accounting
E. 9-3 Internal service funds are accounted for similarly to businesses
William County opted to account for its duplication service center in an internal service fund. Previously the center had been accounted for in the county’s general fund. During the first month in which it was accounted for as an internal service fund the center engaged in the following transactions:
1. Five copiers were transferred to the internal service fund from the government’s general capital assets. At the time of transfer the copiers had a book value (net of accumulated depreciation) of $70,000.
2. The general fund made an initial cash contribution of $35,000 to the internal service fund.
3. The center borrowed $270,000 from a local bank to finance the purchase of additional equipment and renovation of its facilities. It issued a three-year note.
4. It purchased equipment for $160,000 and paid contractors $100,000 for improvements to its facilities.
5. It billed the county clerk’s office $5,000 for printing services, of which the office remitted $2,500.
6. It incurred, and paid in cash, various operating expenses of $9,000.
7. The fund recognized depreciation of $1,500 on its equipment and $900 on the improvements to its facilities.
a. Prepare journal entries in the internal service fund to record the transactions.
b. Comment on the main differences resulting from the shift from the general fund to an internal service fund in how the center's assets and liabilities would be accounted for and reported
Click here for the solution: William County opted to account for its duplication service center in an internal service fund
E. 9-3 Internal service funds are accounted for similarly to businesses
William County opted to account for its duplication service center in an internal service fund. Previously the center had been accounted for in the county’s general fund. During the first month in which it was accounted for as an internal service fund the center engaged in the following transactions:
1. Five copiers were transferred to the internal service fund from the government’s general capital assets. At the time of transfer the copiers had a book value (net of accumulated depreciation) of $70,000.
2. The general fund made an initial cash contribution of $35,000 to the internal service fund.
3. The center borrowed $270,000 from a local bank to finance the purchase of additional equipment and renovation of its facilities. It issued a three-year note.
4. It purchased equipment for $160,000 and paid contractors $100,000 for improvements to its facilities.
5. It billed the county clerk’s office $5,000 for printing services, of which the office remitted $2,500.
6. It incurred, and paid in cash, various operating expenses of $9,000.
7. The fund recognized depreciation of $1,500 on its equipment and $900 on the improvements to its facilities.
a. Prepare journal entries in the internal service fund to record the transactions.
b. Comment on the main differences resulting from the shift from the general fund to an internal service fund in how the center's assets and liabilities would be accounted for and reported
Click here for the solution: William County opted to account for its duplication service center in an internal service fund
Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago
BYP 9-6 Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago. At the time, the company was reporting lagging profits, and Robert was brought in to "stir thing up." The company has three divisions, electronics, fiber optics, and plumbing supplies. Robert has no interest in plumbing supplies, and one of the first fixed costs away from the other two divisions to the plumbing division. This had the effect of causing the plumbing division to report losses during the last two years; in the past it had always reported low, but acceptable, net income. Robert felt that this reallocation would shine a favorable light on him in front of the board of directors because it meant that the electronics and fiber optics divisions would look like they were improving.
Given that these are "business of the future," he believed that the stock market would react favorably to these increase, while not penalizing the poor results of the plumbing division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber optics divisions would not have improved. But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for Phelps their whole lives, would lose their jobs.
Instructions
(a) If a division is reporting losses, does that necessarily mean that it should be closed?
(b) Was the reallocation of fixed costs across division unethical?
(c)What should Robert do?
Click here for the solution: Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago
Given that these are "business of the future," he believed that the stock market would react favorably to these increase, while not penalizing the poor results of the plumbing division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber optics divisions would not have improved. But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for Phelps their whole lives, would lose their jobs.
Instructions
(a) If a division is reporting losses, does that necessarily mean that it should be closed?
(b) Was the reallocation of fixed costs across division unethical?
(c)What should Robert do?
Click here for the solution: Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago
What is the relationship between a bond's price and its yield to maturity?
What is the relationship between a bond's price and its yield to maturity?
Click here for the solution: What is the relationship between a bond's price and its yield to maturity?
Click here for the solution: What is the relationship between a bond's price and its yield to maturity?
Summit Manufacturing, Inc. produces snow shovels
Summit Manufacturing, Inc. produces snow shovels. The selling price per snow shovel is $30.
Costs involved in production are:
Direct material $5
Direct labor 4
Variable manufacturing overhead 3
Total variable manufacturing costs per unit $12
Fixed manufacturing overhead per year $180,000
In addition, the company has fixed selling and administrative costs of $160,000 per year.
EXERCISE 5-11. [LO 1] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is the value of ending inventory using full costing?
EXERCISE 5-12. [LO 1, 2] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is the value of ending inventory using variable costing?
EXERCISE 5-13. [LO 1, 2, 3] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
Calculate the difference in full costing net income and variable costing net income without preparing either income statement.
EXERCISE 5-14. [LO 1] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is cost of goods sold using full costing?
EXERCISE 5-15. [LO 1, 2] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is variable cost of goods sold?
EXERCISE 5-16. [LO 1] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is net income using full costing?
EXERCISE 5-17. [LO 1, 2] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is net income using variable costing?
Click here for the solution: Summit Manufacturing, Inc. produces snow shovels
Costs involved in production are:
Direct material $5
Direct labor 4
Variable manufacturing overhead 3
Total variable manufacturing costs per unit $12
Fixed manufacturing overhead per year $180,000
In addition, the company has fixed selling and administrative costs of $160,000 per year.
EXERCISE 5-11. [LO 1] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is the value of ending inventory using full costing?
EXERCISE 5-12. [LO 1, 2] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is the value of ending inventory using variable costing?
EXERCISE 5-13. [LO 1, 2, 3] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
Calculate the difference in full costing net income and variable costing net income without preparing either income statement.
EXERCISE 5-14. [LO 1] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is cost of goods sold using full costing?
EXERCISE 5-15. [LO 1, 2] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is variable cost of goods sold?
EXERCISE 5-16. [LO 1] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is net income using full costing?
EXERCISE 5-17. [LO 1, 2] During the year, Summit produces 40,000 snow shovels and sells 37,000 snow shovels.
Required
What is net income using variable costing?
Click here for the solution: Summit Manufacturing, Inc. produces snow shovels
The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake
Chapter 6 Problem 6-12 Activity-Based Costing [LO 5]
The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to its strawberry cheesecake and the ABC cost pools:
AND SO ON
Required
a. Calculate the overhead rate per unit of activity for each of the five cost pools.
b. Calculate the total overhead assigned to the production of the strawberry cheesecake.
c. Calculate the overhead cost per unit for the strawberry cheesecake. Round to three decimal places.
d. Calculate the total unit cost for the strawberry cheesecake. Round to three decimal places.
e. Suppose that the Divine Cheesecake Shoppe allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to the strawberry cheesecake. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach. Round to three decimal places.
Click here for the solution: The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake
The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. It has recently adopted an activity-based costing system to assign manufacturing overhead to products. The following data relate to its strawberry cheesecake and the ABC cost pools:
AND SO ON
Required
a. Calculate the overhead rate per unit of activity for each of the five cost pools.
b. Calculate the total overhead assigned to the production of the strawberry cheesecake.
c. Calculate the overhead cost per unit for the strawberry cheesecake. Round to three decimal places.
d. Calculate the total unit cost for the strawberry cheesecake. Round to three decimal places.
e. Suppose that the Divine Cheesecake Shoppe allocates overhead by a traditional production volume-based method using direct labor dollars as the allocation base and one cost pool. Determine the overhead rate per direct labor dollar and the per unit overhead assigned to the strawberry cheesecake. Discuss the difference in cost allocations between the traditional method and the activity-based costing approach. Round to three decimal places.
Click here for the solution: The Divine Cheesecake Shoppe is a national bakery that is known for its strawberry cheesecake
Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff
Comprehensive Master Budget
Accounting 2302
Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firm’s master budget for 20x1. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”
AND SO ON
Prepare Frame-It Company’s master budget for 20x1 by completing the following schedules and statements.
1. Sales budget:
2. Cash receipts budget:
3. Production budget:
4. Direct-material budget
5. Cash disbursements budget:
6. Summary cash budget:
7. Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1. Note: Budgeted and actual MOH will be equal.
8. Prepare Frame-It’s budgeted income statement for 20x1. (Ignore income taxes.)
9. Prepare Frame-It’s budgeted statement of retained earnings for 20x1.
10. Prepare Frame-It’s budgeted balance sheet as of December 31, 20x1.
Click here for the solution: Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff
Accounting 2302
Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firm’s master budget for 20x1. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”
AND SO ON
Prepare Frame-It Company’s master budget for 20x1 by completing the following schedules and statements.
1. Sales budget:
2. Cash receipts budget:
3. Production budget:
4. Direct-material budget
5. Cash disbursements budget:
6. Summary cash budget:
7. Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1. Note: Budgeted and actual MOH will be equal.
8. Prepare Frame-It’s budgeted income statement for 20x1. (Ignore income taxes.)
9. Prepare Frame-It’s budgeted statement of retained earnings for 20x1.
10. Prepare Frame-It’s budgeted balance sheet as of December 31, 20x1.
Click here for the solution: Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff
TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry
CASE 13–30 Make or Buy; Utilization of a Constrained Resource [LO1, LO3, LO5]
TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums:
WVD Drums
Selling price per drum . . . . . . . . . . . . . . $149.00
Cost per drum:
Direct materials . . . . . . . . . . . . . . . . . $52.10
Direct labor ($18 per hour) . . . . . . . . 3.60
Manufacturing overhead . . . . . . . . . . 4.50
Selling and administrative expense. . 29.80 90.00
Margin per drum . . . . . . . . . . . . . . . . . . $ 59.00
AND SO ON
ALL 5 REQUIREMENTS ANSWERED.
Click here for the solution: TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry
TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums:
WVD Drums
Selling price per drum . . . . . . . . . . . . . . $149.00
Cost per drum:
Direct materials . . . . . . . . . . . . . . . . . $52.10
Direct labor ($18 per hour) . . . . . . . . 3.60
Manufacturing overhead . . . . . . . . . . 4.50
Selling and administrative expense. . 29.80 90.00
Margin per drum . . . . . . . . . . . . . . . . . . $ 59.00
AND SO ON
ALL 5 REQUIREMENTS ANSWERED.
Click here for the solution: TufStuff, Inc. sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry
Software Solutions, Inc., was started by two young software engineers to market SpamBlocker
Problem A-6 The Economists’ Approach to Pricing; Absorption Costing Approach to Cost-Plus Pricing
Software Solutions, Inc., was started by two young software engineers to market SpamBlocker, a software application they had written that screens incoming e-mail messages and eliminates unsolicited mass mailings. Sales of the software have been good at 50,000 units a month, but the company has been losing money as shown below:
Sales (50,000 units _ $25 per unit) . . . . . . . . . $1,250,000
Variable cost (50,000 units _ $6 per unit) . . . . 300,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . 950,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . 960,000
Net operating income (loss) . . . . . . . . . . . . . . . $ (10,000)
The company’s only variable cost is the $6 fee it pays to another company to reproduce the software on floppy diskettes, print manuals, and package the result in an attractive box for sale to consumers. Monthly fixed selling and administrative expenses are $960,000. The company’s marketing manager has been arguing for some time that the software is priced too high. She estimates that every 5% decrease in price will yield an 8% increase in unit sales. The marketing manager would like your help in preparing a presentation to the company’s owners concerning the pricing issue.
Required:
1. To help the marketing manager prepare for her presentation, she has asked you to fill in the blanks in the following table. The selling prices in the table were computed by successively decreasing the selling price by 5%. The estimated unit sales were computed by successively increasing the unit sales by 8%. For example, $23.75 is 5% less than $25.00 and 54,000 units is 8% more than 50,000 units
Selling Price, Estimated Unit Sales, Sales, Variable Cost, Fixed Expenses, Net Operating Income
$25.00 50,000 $1,250,000 $300,000 $960,000 $(10,000)
$23.75 54,000 $1,282,500 $324,000 $960,000 $ (1,500)
$22.56 58,320 ? ? ? ?
$21.43 62,986 ? ? ? ?
$20.36 68,025 ? ? ? ?
$19.34 73,467 ? ? ? ?
$18.37 79,344 ? ? ? ?
$17.45 85,692 ? ? ? ?
$16.58 92,547 ? ? ? ?
$15.75 99,951 ? ? ? ?
2. Using the data from the table, construct a chart that shows the net operating income as a function of the selling price. Put the selling price on the X-axis and the net operating income on the Y-axis. Using the chart, determine the approximate selling price at which net operating income is maximized.
3. Compute the price elasticity of demand for the SpamBlocker software. Based on this calculation, what is the profit-maximizing price?
4. The owners have invested $2,000,000 in the company and feel that they should be earning at least 2% per month on these funds. If the absorption costing approach to pricing were used, what would be the target selling price based on the current sales of 50,000 units? What do you think would happen to the net operating income of the company if this price were charged?
5. If the owners of the company are dissatisfied with the net operating income and return on investment at the selling price you computed in (3) above, should they increase the selling price? Explain.
Click here for the solution: Software Solutions, Inc., was started by two young software engineers to market SpamBlocker
Software Solutions, Inc., was started by two young software engineers to market SpamBlocker, a software application they had written that screens incoming e-mail messages and eliminates unsolicited mass mailings. Sales of the software have been good at 50,000 units a month, but the company has been losing money as shown below:
Sales (50,000 units _ $25 per unit) . . . . . . . . . $1,250,000
Variable cost (50,000 units _ $6 per unit) . . . . 300,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . 950,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . 960,000
Net operating income (loss) . . . . . . . . . . . . . . . $ (10,000)
The company’s only variable cost is the $6 fee it pays to another company to reproduce the software on floppy diskettes, print manuals, and package the result in an attractive box for sale to consumers. Monthly fixed selling and administrative expenses are $960,000. The company’s marketing manager has been arguing for some time that the software is priced too high. She estimates that every 5% decrease in price will yield an 8% increase in unit sales. The marketing manager would like your help in preparing a presentation to the company’s owners concerning the pricing issue.
Required:
1. To help the marketing manager prepare for her presentation, she has asked you to fill in the blanks in the following table. The selling prices in the table were computed by successively decreasing the selling price by 5%. The estimated unit sales were computed by successively increasing the unit sales by 8%. For example, $23.75 is 5% less than $25.00 and 54,000 units is 8% more than 50,000 units
Selling Price, Estimated Unit Sales, Sales, Variable Cost, Fixed Expenses, Net Operating Income
$25.00 50,000 $1,250,000 $300,000 $960,000 $(10,000)
$23.75 54,000 $1,282,500 $324,000 $960,000 $ (1,500)
$22.56 58,320 ? ? ? ?
$21.43 62,986 ? ? ? ?
$20.36 68,025 ? ? ? ?
$19.34 73,467 ? ? ? ?
$18.37 79,344 ? ? ? ?
$17.45 85,692 ? ? ? ?
$16.58 92,547 ? ? ? ?
$15.75 99,951 ? ? ? ?
2. Using the data from the table, construct a chart that shows the net operating income as a function of the selling price. Put the selling price on the X-axis and the net operating income on the Y-axis. Using the chart, determine the approximate selling price at which net operating income is maximized.
3. Compute the price elasticity of demand for the SpamBlocker software. Based on this calculation, what is the profit-maximizing price?
4. The owners have invested $2,000,000 in the company and feel that they should be earning at least 2% per month on these funds. If the absorption costing approach to pricing were used, what would be the target selling price based on the current sales of 50,000 units? What do you think would happen to the net operating income of the company if this price were charged?
5. If the owners of the company are dissatisfied with the net operating income and return on investment at the selling price you computed in (3) above, should they increase the selling price? Explain.
Click here for the solution: Software Solutions, Inc., was started by two young software engineers to market SpamBlocker
Friday, April 15, 2016
Barlow Company manufactures three products: A, B, and C
Exercise 13-5 Utilization of a Constrained Resource
Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, and Contribution margin for one unit of each product follow:
Product
A B C
Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180 $270 $240
Variable expenses:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . 24 72 32
Other variable expenses . . . . . . . . . . . . . . . . . . 102 90 148
Total variable expenses . . . . . . . . . . . . . . . . . . . . . 126 162 180
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . $ 54 $108 $ 60
Contribution margin ratio . . . . . . . . . . . . . . . . . . . . 30% 40% 25%
The same raw material is used in all three products. Barlow Company has only 5,000 pounds of raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier’s plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs $8 per pound.
Required:
1. Compute the amount of contribution margin that will be obtained per pound of material used in each product.
2. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C? Show computations.
3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials? Explain.
Click here for the solution: Barlow Company manufactures three products: A, B, and C
Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, and Contribution margin for one unit of each product follow:
Product
A B C
Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180 $270 $240
Variable expenses:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . 24 72 32
Other variable expenses . . . . . . . . . . . . . . . . . . 102 90 148
Total variable expenses . . . . . . . . . . . . . . . . . . . . . 126 162 180
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . $ 54 $108 $ 60
Contribution margin ratio . . . . . . . . . . . . . . . . . . . . 30% 40% 25%
The same raw material is used in all three products. Barlow Company has only 5,000 pounds of raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier’s plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs $8 per pound.
Required:
1. Compute the amount of contribution margin that will be obtained per pound of material used in each product.
2. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C? Show computations.
3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials? Explain.
Click here for the solution: Barlow Company manufactures three products: A, B, and C
Presented below is selected information from the Greenville Company's current period accounting records (in $000s)
Presented below is selected information from the Greenville Company's current period accounting records (in $000s):
Sales $10,000
Raw Materials Used 2,500
Direct Labor Costs 1,000
Period Costs (Selling and Administrative) 2,500
Beginning Raw Material Inventory 300
Ending Raw Material Inventory 1,000
Net Income 200
Beginning Work-in-Process Inventory 0
Ending Work-in-Process Inventory 300
Beginning Finished Goods Inventory 700
Ending Finished Goods Inventory 400
* NOTE: All raw materials used were direct materials.
Question:
Determine the following (in dollars):
a. Raw Material Purchases
b. Gross Profit
c. Cost of Goods Manufactured
d. Manufacturing Overhead
Click here for the solution: Presented below is selected information from the Greenville Company's current period accounting records (in $000s)
Sales $10,000
Raw Materials Used 2,500
Direct Labor Costs 1,000
Period Costs (Selling and Administrative) 2,500
Beginning Raw Material Inventory 300
Ending Raw Material Inventory 1,000
Net Income 200
Beginning Work-in-Process Inventory 0
Ending Work-in-Process Inventory 300
Beginning Finished Goods Inventory 700
Ending Finished Goods Inventory 400
* NOTE: All raw materials used were direct materials.
Question:
Determine the following (in dollars):
a. Raw Material Purchases
b. Gross Profit
c. Cost of Goods Manufactured
d. Manufacturing Overhead
Click here for the solution: Presented below is selected information from the Greenville Company's current period accounting records (in $000s)
(Cost Function for Expedia) Expedia provides travel services on the Internet
3-34 Cost Function for Expedia
Expedia provides travel services on the Internet. 2002 was an important year for Expedia as it reported positive operating income after three years of operating losses. In the first quarter of 2001, Expedia reported an operating loss of $19 million on sales revenue of $57 million. In the first quarter of 2002, sales revenue had more than doubled to $116 million, and Expedia had operating income of $18 million. Assume that fixed costs were the same in 2002 as in 2001.
1. Compute the operating expenses for Expedia in the first quarter of 2001. In the first quarter of 2002.
2. Determine the cost function for Expedia, that is, the total fixed cost and the variable cost as a percentage of sales revenue. Use the same form as equation (1) on page 100.
3. Explain how Expedia’s operating income could increase by $37 million with an increase in sales of $59 million, while it had an operating loss of $19 million on its $57 million of sales in the first quarter of 01
Click here for the solution: (Cost Function for Expedia) Expedia provides travel services on the Internet
Expedia provides travel services on the Internet. 2002 was an important year for Expedia as it reported positive operating income after three years of operating losses. In the first quarter of 2001, Expedia reported an operating loss of $19 million on sales revenue of $57 million. In the first quarter of 2002, sales revenue had more than doubled to $116 million, and Expedia had operating income of $18 million. Assume that fixed costs were the same in 2002 as in 2001.
1. Compute the operating expenses for Expedia in the first quarter of 2001. In the first quarter of 2002.
2. Determine the cost function for Expedia, that is, the total fixed cost and the variable cost as a percentage of sales revenue. Use the same form as equation (1) on page 100.
3. Explain how Expedia’s operating income could increase by $37 million with an increase in sales of $59 million, while it had an operating loss of $19 million on its $57 million of sales in the first quarter of 01
Click here for the solution: (Cost Function for Expedia) Expedia provides travel services on the Internet
Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs
3-35 Predicting Costs
Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs:
1. Fuel costs of driving vehicles, $0.20 per mile, driven 17,000 miles per month
2. Equipment rental cost, $6,000 per piece of equipment per month for seven pieces for three
months
3. Ambulance and EMT personnel cost for a soccer tournament, $1,200 for each 250 tournament participants; the tournament is expecting 2,400 participants
4. Purchasing department cost, $7,500 per month plus $4 per material order processed at 4,000 orders in one month
Click here for the solution: Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs
Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs:
1. Fuel costs of driving vehicles, $0.20 per mile, driven 17,000 miles per month
2. Equipment rental cost, $6,000 per piece of equipment per month for seven pieces for three
months
3. Ambulance and EMT personnel cost for a soccer tournament, $1,200 for each 250 tournament participants; the tournament is expecting 2,400 participants
4. Purchasing department cost, $7,500 per month plus $4 per material order processed at 4,000 orders in one month
Click here for the solution: Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs
Tori Amos Corporation began operations on December 1, 2006
E8-22 (Alternative Inventory Methods—Comprehensive) Tori Amos Corporation began operations on December 1, 2006. The only inventory transaction in 2006 was the purchase of inventory on December 10, 2006, at a cost of $20 per unit. None of this inventory was sold in 2006. Relevant information is as follows.
Ending inventory units
December 31, 2006 100
December 31, 2007, by purchase date
December 2, 2007 100
July 20, 2007 50 150
During the year the following purchases and sales were made:
Purchases Sales
March 15 300 units at $24 April 10 200
July 20 300 units at 25 August 20 300
September 4 200 units at 28 November 18 150
December 2 100 units at 30 December 12 200
The company uses the periodic inventory method.
Determine ending inventory using dollar-value LIFO. Assume that the December 2, 2007, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base layer priced at $20 per unit.)
Click here for the solution: Tori Amos Corporation began operations on December 1, 2006
Ending inventory units
December 31, 2006 100
December 31, 2007, by purchase date
December 2, 2007 100
July 20, 2007 50 150
During the year the following purchases and sales were made:
Purchases Sales
March 15 300 units at $24 April 10 200
July 20 300 units at 25 August 20 300
September 4 200 units at 28 November 18 150
December 2 100 units at 30 December 12 200
The company uses the periodic inventory method.
Determine ending inventory using dollar-value LIFO. Assume that the December 2, 2007, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base layer priced at $20 per unit.)
Click here for the solution: Tori Amos Corporation began operations on December 1, 2006
In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000
P11-7 Depletion; change in estimate
In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000. Additional costs of $600,000 were incurred to develop the mine. Geologists estimated that 400,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $100,000.
To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $150,000. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $80,000 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $4,000 after the mining project is completed.
In 2011, 50,000 tons of ore was extracted and sold. In 2012, the estimate of total tons of ore in the mine was revised from 400,000 to 487,500. During 2012, 80,000 tons were extracted, of which 60,000 tons were sold.
1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2011 and 2012. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.
2. Compute the book value of the mineral mine, structures, and equipment as of December 31, 2012.
3. Discuss the accounting treatment of the depletion and depreciation on the mine and mining facilities and equipment.
Click here for the solution: In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000
In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000. Additional costs of $600,000 were incurred to develop the mine. Geologists estimated that 400,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $100,000.
To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $150,000. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $80,000 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $4,000 after the mining project is completed.
In 2011, 50,000 tons of ore was extracted and sold. In 2012, the estimate of total tons of ore in the mine was revised from 400,000 to 487,500. During 2012, 80,000 tons were extracted, of which 60,000 tons were sold.
1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2011 and 2012. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.
2. Compute the book value of the mineral mine, structures, and equipment as of December 31, 2012.
3. Discuss the accounting treatment of the depletion and depreciation on the mine and mining facilities and equipment.
Click here for the solution: In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000
The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2009
P11-5 Property, plant, and equipment and intangible assets; comprehensive
The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2009. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company's records and personnel:
a. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
b. Land A and Building A were acquired from a predecessor corporation. Thompson paid $812,500 for the land and building together. At the time of acquisition, the land had a fair value of $72,000 and the building had a fair value of $828,000.
c. Land B was acquired on October 2, 2009, in exchange for 3,000 newly issued shares of Thompson's common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $25 per share. During October 2009, Thompson paid $10,400 to demolish an existing building on this land so it could construct a new building.
d. Construction of Building B on the newly acquired land began on October 1, 2010. By September 30, 2011, Thompson had paid $210,000 of the estimated total construction costs of $300,000. Estimated completion and occupancy are July 2012.
e. Certain equipment was donated to the corporation by the city. An independent appraisal of the equipment when donated placed the fair value at $16,000 and the residual value at $2,000.
f. Machine A's total cost of $110,000 includes installation charges of $550 and normal repairs and maintenance of $11,000. Residual value is estimated at $5,500. Machine A was sold on February 1, 2011.
g. On October 1, 2010, Machine B was acquired with a down payment of $4,000 and the remaining payments to be made in 10 annual installments of $4,000 each beginning October 1, 2011. The prevailing interest rate was 8%.
Required:
Supply the correct amount for each numbered item on the schedule. Round each answer to the nearest dollar.
Click here for the solution: The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2009
The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2009. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company's records and personnel:
a. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
b. Land A and Building A were acquired from a predecessor corporation. Thompson paid $812,500 for the land and building together. At the time of acquisition, the land had a fair value of $72,000 and the building had a fair value of $828,000.
c. Land B was acquired on October 2, 2009, in exchange for 3,000 newly issued shares of Thompson's common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $25 per share. During October 2009, Thompson paid $10,400 to demolish an existing building on this land so it could construct a new building.
d. Construction of Building B on the newly acquired land began on October 1, 2010. By September 30, 2011, Thompson had paid $210,000 of the estimated total construction costs of $300,000. Estimated completion and occupancy are July 2012.
e. Certain equipment was donated to the corporation by the city. An independent appraisal of the equipment when donated placed the fair value at $16,000 and the residual value at $2,000.
f. Machine A's total cost of $110,000 includes installation charges of $550 and normal repairs and maintenance of $11,000. Residual value is estimated at $5,500. Machine A was sold on February 1, 2011.
g. On October 1, 2010, Machine B was acquired with a down payment of $4,000 and the remaining payments to be made in 10 annual installments of $4,000 each beginning October 1, 2011. The prevailing interest rate was 8%.
Required:
Supply the correct amount for each numbered item on the schedule. Round each answer to the nearest dollar.
Click here for the solution: The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2009
Computer Boutique sells computer equipment and home office furniture
Computer Boutique sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50% of the company's retail floor space. The president of Computer Boutique is trying to decide whether the company should continue offering furniture or just concentrate on computer equipment. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13%. Allocated fixed costs are assigned based on relative sales.
Computer Home
Office Equipment Furniture Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
President's salary 76,470 53,350 130,000
Other 7,058 4,942 12,000
Total costs 340,292 380,708 649,000
Net Income $159,708 ($ 8,708) $151,000
Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line.
Click here for the solution: Computer Boutique sells computer equipment and home office furniture
Computer Home
Office Equipment Furniture Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
President's salary 76,470 53,350 130,000
Other 7,058 4,942 12,000
Total costs 340,292 380,708 649,000
Net Income $159,708 ($ 8,708) $151,000
Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line.
Click here for the solution: Computer Boutique sells computer equipment and home office furniture
On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process
E11-10 Double-declining-balance method; switch to straight line
On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures made to acquire the asset were as follows:
Purchase price $154,000
Freight charges 2,000
Installation charges 4,000
Jackson's policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment's life and then switch to straight line halfway through the equipment's life.
Required:
1. Calculate depreciation for each year of the asset's eight-year life.
2. Discuss the accounting treatment of the depreciation on the equipment.
Click here for the solution: On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process
On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures made to acquire the asset were as follows:
Purchase price $154,000
Freight charges 2,000
Installation charges 4,000
Jackson's policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment's life and then switch to straight line halfway through the equipment's life.
Required:
1. Calculate depreciation for each year of the asset's eight-year life.
2. Discuss the accounting treatment of the depreciation on the equipment.
Click here for the solution: On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process
(ACC 422 Week 4) Leontyne Price Company from time to time embarks on a research program when a special project seems to offer possibilities
E12-16 (Accounting for R&D Costs) Leontyne Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2006 the company expends $325,000 on a research project, but by the end of 2006 it is impossible to determine whether any benefit will be derived from it.
Instructions
(a) What account should be charged for the $325,000, and how should it be shown in the financial statements?
(b) The project is completed in 2007, and a successful patent is obtained. The R&D costs to complete the project are $110,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2007 total $16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2007.
(c) In 2008, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2015. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2008.
(d) Additional engineering and consulting costs incurred in 2008 required to advance the design of a product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.
Click here for the solution: (ACC 422 Week 4) Leontyne Price Company from time to time embarks on a research program when a special project seems to offer possibilities
Instructions
(a) What account should be charged for the $325,000, and how should it be shown in the financial statements?
(b) The project is completed in 2007, and a successful patent is obtained. The R&D costs to complete the project are $110,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2007 total $16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2007.
(c) In 2008, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2015. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2008.
(d) Additional engineering and consulting costs incurred in 2008 required to advance the design of a product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.
Click here for the solution: (ACC 422 Week 4) Leontyne Price Company from time to time embarks on a research program when a special project seems to offer possibilities
Wednesday, April 13, 2016
For each of the following costs, identify whether the item is:
For each of the following costs, identify whether the item is:
A variable or fixed cost?
Direct or indirect cost?
Controllable or uncontrollable cost?
For example: Plant Utilities would be a variable, indirect, and controllable cost.
Not all items will fit into each category. Items that do not fit a category should be labeled as not applicable.
Raw materials.
Staples used to secure packed boxes of the product.
Plant janitor’s wages.
Order processing clerk’s wages.
Advertising expenses.
Production worker’s wages.
Production supervisor’s salaries.
Sales force commissions.
Maintenance supplies used.
President’s salary.
Electricity cost for the office building.
Real estate taxes for the plant.
Production-run setup costs.
Depreciation of plant equipment.
Outbound shipping costs.
Use a table format to complete this assignment.
Click here for the solution: For each of the following costs, identify whether the item is:
A variable or fixed cost?
Direct or indirect cost?
Controllable or uncontrollable cost?
For example: Plant Utilities would be a variable, indirect, and controllable cost.
Not all items will fit into each category. Items that do not fit a category should be labeled as not applicable.
Raw materials.
Staples used to secure packed boxes of the product.
Plant janitor’s wages.
Order processing clerk’s wages.
Advertising expenses.
Production worker’s wages.
Production supervisor’s salaries.
Sales force commissions.
Maintenance supplies used.
President’s salary.
Electricity cost for the office building.
Real estate taxes for the plant.
Production-run setup costs.
Depreciation of plant equipment.
Outbound shipping costs.
Use a table format to complete this assignment.
Click here for the solution: For each of the following costs, identify whether the item is:
Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty
Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty. To settle the debt, Henry agrees to accept from Cole equipment with a fair value of $570,000, an original cost of $840,000, and accumulated depreciation of $195,000.
Instructions
(a) Compute the gain or loss to Cole on the settlement of the debt.
(b) Compute the gain or loss to Cole on the transfer of the equipment.
(c) Prepare the journal entry on Cole's books to record the settlement of this debt.
(d) Prepare the journal entry on Henry's books to record the settlement of the receivable.
Click here for the solution: Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty
Instructions
(a) Compute the gain or loss to Cole on the settlement of the debt.
(b) Compute the gain or loss to Cole on the transfer of the equipment.
(c) Prepare the journal entry on Cole's books to record the settlement of this debt.
(d) Prepare the journal entry on Henry's books to record the settlement of the receivable.
Click here for the solution: Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty
1. In comparing financial and management accounting, which of the following more accurately describes management accounting information? (Points : 1)
MULTIPLE CHOICE
1. In comparing financial and management accounting, which of the following more accurately describes management accounting information? (Points : 1)
2. One major difference between financial and management accounting is that _______. (Points : 1)
3. Which of the following is not a valid method for determining product cost? (Points : 1)
4. Cost accounting is directed toward the needs of _______. (Points : 1)
5. Financial accounting _______. (Points : 1)
6. Which of the following statements is true? (Points : 1)
7. Which of the following statements is false? (Points : 1)
8. The set of processes that convert inputs into services and products that consumers use is called _______. (Points : 1)
9. The balanced scorecard perspective that focuses on using a firm's intellectual capital to adapt to customer needs through product or service innovations is the ________. (Points : 1)
10. The world has essentially become smaller because of _______. (Points : 1)
11. The term "relevant range" as used in cost accounting means the range over which ______. (Points : 1)
12. When cost relationships are linear, total variable prime costs will vary in proportion to changes in ______. (Points : 1)
13. An example of a fixed cost is _______. (Points : 1)
14. A(n) ____ cost increases or decreases in intervals as activity changes. (Points : 1)
15. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n) ________. (Points : 1)
16. A cost driver _______. (Points : 1)
17. Product costs are deducted from revenue _______. (Points : 1)
18. Which of the following is not a product cost component? (Points : 1)
19. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was $4,500; raw material purchases of $29,600 were made during the month. At month end, $7,700 of raw material was on hand. Raw material used during the month was _______. (Points : 1)
20. Urban Company manufacturers tables. If raw material used was $80,000 and Raw Material Inventory at the beginning and end of the period, respectively, was $17,000 and $21,000, what was amount of raw material was purchased? (Points : 1)
Click here for the solution: 1. In comparing financial and management accounting, which of the following more accurately describes management accounting information? (Points : 1)
1. In comparing financial and management accounting, which of the following more accurately describes management accounting information? (Points : 1)
2. One major difference between financial and management accounting is that _______. (Points : 1)
3. Which of the following is not a valid method for determining product cost? (Points : 1)
4. Cost accounting is directed toward the needs of _______. (Points : 1)
5. Financial accounting _______. (Points : 1)
6. Which of the following statements is true? (Points : 1)
7. Which of the following statements is false? (Points : 1)
8. The set of processes that convert inputs into services and products that consumers use is called _______. (Points : 1)
9. The balanced scorecard perspective that focuses on using a firm's intellectual capital to adapt to customer needs through product or service innovations is the ________. (Points : 1)
10. The world has essentially become smaller because of _______. (Points : 1)
11. The term "relevant range" as used in cost accounting means the range over which ______. (Points : 1)
12. When cost relationships are linear, total variable prime costs will vary in proportion to changes in ______. (Points : 1)
13. An example of a fixed cost is _______. (Points : 1)
14. A(n) ____ cost increases or decreases in intervals as activity changes. (Points : 1)
15. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n) ________. (Points : 1)
16. A cost driver _______. (Points : 1)
17. Product costs are deducted from revenue _______. (Points : 1)
18. Which of the following is not a product cost component? (Points : 1)
19. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was $4,500; raw material purchases of $29,600 were made during the month. At month end, $7,700 of raw material was on hand. Raw material used during the month was _______. (Points : 1)
20. Urban Company manufacturers tables. If raw material used was $80,000 and Raw Material Inventory at the beginning and end of the period, respectively, was $17,000 and $21,000, what was amount of raw material was purchased? (Points : 1)
Click here for the solution: 1. In comparing financial and management accounting, which of the following more accurately describes management accounting information? (Points : 1)
1. A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: (Points : 1)
MULTIPLE CHOICE
1. A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: (Points : 1)
2. Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet? (Points : 1)
3. Large, highly rated firms sometimes sell commercial paper: (Points : 1)
4. Which of the following increases the investment account under the equity method of accounting? (Points : 1)
5. When the equity method of accounting for investments is used by the investor, the investment account is increased when: (Points : 1)
6. Which of the following is a contingency that would most likely require accrual? (Points : 1)
7. When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: (Points : 1)
8. Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report: (Points : 1)
9. The key accounting considerations relating to accounts payable are: (Points : 1)
10. The investment category for which the investor's "positive intent and ability to hold" is important is: (Points : 1)
Click here for the solution: 1. A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: (Points : 1)
1. A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: (Points : 1)
2. Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet? (Points : 1)
3. Large, highly rated firms sometimes sell commercial paper: (Points : 1)
4. Which of the following increases the investment account under the equity method of accounting? (Points : 1)
5. When the equity method of accounting for investments is used by the investor, the investment account is increased when: (Points : 1)
6. Which of the following is a contingency that would most likely require accrual? (Points : 1)
7. When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: (Points : 1)
8. Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report: (Points : 1)
9. The key accounting considerations relating to accounts payable are: (Points : 1)
10. The investment category for which the investor's "positive intent and ability to hold" is important is: (Points : 1)
Click here for the solution: 1. A contingent loss should be reported in a footnote to the financial statements rather than being accrued if: (Points : 1)
1. Nu Company reported the following pretax data for its first year of operations
MULTIPLE CHOICE
1. Nu Company reported the following pretax data for its first year of operations.
Net sales 2,800 Cost of goods available for sale 2,500 Operating expenses 880 Effective tax rate 40% Ending inventories: If LIFO is elected 820 If FIFO is elected 1,060
What is Nu's gross profit percentage if it elects LIFO? (Points : 1)
2. The use of LIFO during a long inflationary period can result in: (Points : 1)
3. The primary reason for the popularity of LIFO is that it gives: (Points : 1)
4. In determining the cost-to-retail percentage for the current year,: (Points : 1)
5. Inventory does not include: (Points : 1)
6. So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2006. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2006, $300,000; sales and purchases from January 1, 2006, to May 1, 2006, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2006, is: (Points : 1)
7. In a period when prices are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of: (Points : 1)
8. To determine the value of a LIFO layer, using dollar-value LIFO retail: (Points : 1)
9. When using the gross profit method to estimate ending inventory, it is not necessary to know: (Points : 1)
10. The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be: (Points : 1)
Click here for the solution: 1. Nu Company reported the following pretax data for its first year of operations
1. Nu Company reported the following pretax data for its first year of operations.
Net sales 2,800 Cost of goods available for sale 2,500 Operating expenses 880 Effective tax rate 40% Ending inventories: If LIFO is elected 820 If FIFO is elected 1,060
What is Nu's gross profit percentage if it elects LIFO? (Points : 1)
2. The use of LIFO during a long inflationary period can result in: (Points : 1)
3. The primary reason for the popularity of LIFO is that it gives: (Points : 1)
4. In determining the cost-to-retail percentage for the current year,: (Points : 1)
5. Inventory does not include: (Points : 1)
6. So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2006. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2006, $300,000; sales and purchases from January 1, 2006, to May 1, 2006, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2006, is: (Points : 1)
7. In a period when prices are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of: (Points : 1)
8. To determine the value of a LIFO layer, using dollar-value LIFO retail: (Points : 1)
9. When using the gross profit method to estimate ending inventory, it is not necessary to know: (Points : 1)
10. The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be: (Points : 1)
Click here for the solution: 1. Nu Company reported the following pretax data for its first year of operations
(Comprehensive Problem 1) Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2010
Comprehensive Problem 1
Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2010. The accounting cycle for Kelly Consulting for April, including financial statements was illustrated on page 157-168. During May, Kelly consulting entered the following transactions:
Check Figure: 8. Net Income $27,665
May 3. Received cash from clients as an advance payment for services to be provided and recorded it as unearned fees, $2,500.
5. Received cash from clients on account, $1,750.
9. Paid cash for a newspaper advertisement, $300.
13. Paid office station company for part of the debt incurred on april 5, $400.
15. Recorded services provided on account for the period May 1-15, $6,100.
16. paid part-time receptionist for two weeks' salary including the amount owed on April 30, $750.
17. Recorded cash from cash clients for fees earned during the period May 1-16, $8,200.
20. Purchased supplies on account, $400
21. Recorded services provided on account for the period May 16-20, $3,900.
25. Recorded cash from cash clients for fees earned for the period May 17-23, $5,100.
27. Received cash from clients on account, $9,500.
28. Paid part-time receptionist for two weeks salary, $750.
30. Paid telephone bill for May, $120.
31. Paid electricity bill for May $290.
31. Recorded cash from cash clients for fees earned for the period May 26-31, $3,875.
31. Recorded services provided on account for the remainder of May, $3,200.
31. Kelly withdrew $8,000 for personal use.
Instructions:
1. The chart of accounts for Kelly Consulting is shown on page 158, and the post-closing trial balance as of April 30, 2010 is shown on page 166. For each account in the post-closing trial balance, enter the balance in the appropriate balance column of a four column account. Date the balances May 1, 2010, and place a check mark in the posting reference column. Journalize each of the May transactions in a two column journal using Kelly Consulting's chart of accounts. (do not insert the account numbers in the journal at this time.)
2. Post the journal to a ledger of four-column accounts.
3. Prepare an unadjusted trail balance
4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts 5 and 6.
a. Insurance expired during May is $300.
b. Supplies on hand on May 31 are $600.
c. Depreciation of office equipment for May is $330.
d. Accrued receptionist salary on May 31 is $240.
e. Rent expired during May is $1,600.
f. Unearned fees on May 31 are $2,000
5. Enter the unadjusted trial balance on an end-of-period spreadsheet (worksheet) and complete the spreadsheet.
6. Journalize and post the adjusting entries.
7.Prepare an adjusted trial balance.
8. Prepare an income statement, a statement of owner's equity, and a balance sheet.
9. Prepare and post the closing entries. (Income summary is account #33 in the chart of accounts.) Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry.
10. Prepare a post-closing trial balance
Click here for the solution: (Comprehensive Problem 1) Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2010
Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2010. The accounting cycle for Kelly Consulting for April, including financial statements was illustrated on page 157-168. During May, Kelly consulting entered the following transactions:
Check Figure: 8. Net Income $27,665
May 3. Received cash from clients as an advance payment for services to be provided and recorded it as unearned fees, $2,500.
5. Received cash from clients on account, $1,750.
9. Paid cash for a newspaper advertisement, $300.
13. Paid office station company for part of the debt incurred on april 5, $400.
15. Recorded services provided on account for the period May 1-15, $6,100.
16. paid part-time receptionist for two weeks' salary including the amount owed on April 30, $750.
17. Recorded cash from cash clients for fees earned during the period May 1-16, $8,200.
20. Purchased supplies on account, $400
21. Recorded services provided on account for the period May 16-20, $3,900.
25. Recorded cash from cash clients for fees earned for the period May 17-23, $5,100.
27. Received cash from clients on account, $9,500.
28. Paid part-time receptionist for two weeks salary, $750.
30. Paid telephone bill for May, $120.
31. Paid electricity bill for May $290.
31. Recorded cash from cash clients for fees earned for the period May 26-31, $3,875.
31. Recorded services provided on account for the remainder of May, $3,200.
31. Kelly withdrew $8,000 for personal use.
Instructions:
1. The chart of accounts for Kelly Consulting is shown on page 158, and the post-closing trial balance as of April 30, 2010 is shown on page 166. For each account in the post-closing trial balance, enter the balance in the appropriate balance column of a four column account. Date the balances May 1, 2010, and place a check mark in the posting reference column. Journalize each of the May transactions in a two column journal using Kelly Consulting's chart of accounts. (do not insert the account numbers in the journal at this time.)
2. Post the journal to a ledger of four-column accounts.
3. Prepare an unadjusted trail balance
4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts 5 and 6.
a. Insurance expired during May is $300.
b. Supplies on hand on May 31 are $600.
c. Depreciation of office equipment for May is $330.
d. Accrued receptionist salary on May 31 is $240.
e. Rent expired during May is $1,600.
f. Unearned fees on May 31 are $2,000
5. Enter the unadjusted trial balance on an end-of-period spreadsheet (worksheet) and complete the spreadsheet.
6. Journalize and post the adjusting entries.
7.Prepare an adjusted trial balance.
8. Prepare an income statement, a statement of owner's equity, and a balance sheet.
9. Prepare and post the closing entries. (Income summary is account #33 in the chart of accounts.) Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry.
10. Prepare a post-closing trial balance
Click here for the solution: (Comprehensive Problem 1) Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2010
Nancy Company has budgeted sales of $300,000 with the following budgeted costs
Nancy Company has budgeted sales of $300,000 with the following budgeted costs:
Direct materials $60,000
Direct manufacturing labor 40,000
Factory overhead
Variable 30,000
Fixed 50,000
Selling and administrative expenses
Variable 20,000
Fixed 30,000
Question 1: Compute the average markup percentage for setting prices as a percentage of the full cost of the product (5 points)
Question 2: Compute the average markup percentage for setting prices as a percentage of the variable cost of the product (5 points)
Question 3: Compute the average markup percentage for setting prices as a percentage of the variable manufacturing costs (5 points)
Click here for the solution: Nancy Company has budgeted sales of $300,000 with the following budgeted costs
Direct materials $60,000
Direct manufacturing labor 40,000
Factory overhead
Variable 30,000
Fixed 50,000
Selling and administrative expenses
Variable 20,000
Fixed 30,000
Question 1: Compute the average markup percentage for setting prices as a percentage of the full cost of the product (5 points)
Question 2: Compute the average markup percentage for setting prices as a percentage of the variable cost of the product (5 points)
Question 3: Compute the average markup percentage for setting prices as a percentage of the variable manufacturing costs (5 points)
Click here for the solution: Nancy Company has budgeted sales of $300,000 with the following budgeted costs
Better Food Company recently acquired an olive oil processing company that has an annual capacity
Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:
Direct materials per liter $1.00
Direct processing labor 0.50
Variable processing overhead 0.24
Fixed processing overhead 0.40
Total $2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.
Question 1: Compute the operating income for the Olive Oil Division using a transfer price of $4 (5 points).
Question 2: Compute the operating income for the Olive Oil Division using a transfer price of $2.14 (5 points).
Question 3: What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation (5 points).
Click here for the solution: Better Food Company recently acquired an olive oil processing company that has an annual capacity
Direct materials per liter $1.00
Direct processing labor 0.50
Variable processing overhead 0.24
Fixed processing overhead 0.40
Total $2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter.
Question 1: Compute the operating income for the Olive Oil Division using a transfer price of $4 (5 points).
Question 2: Compute the operating income for the Olive Oil Division using a transfer price of $2.14 (5 points).
Question 3: What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation (5 points).
Click here for the solution: Better Food Company recently acquired an olive oil processing company that has an annual capacity
Elder Company is a manufacturer of personal computers
E1-5 Elder Company is a manufacturer of personal computers. Various costs and expenses associated with its operations are below. The company intends to classify these costs and expenses into categories. Match the Cost and Expenses with the appropriate Category.
Associate each cost/expense with each association category:
Cost and Expenses Association Categories
1. Property taxes on the factory building
2. Production superintendents’ salaries
3. Memory boards and chips used in assembling computers
4. Depreciation on the factory equipment.
5. Salaries for assembly line quality control inspectors
6. Sales commissions paid to sell personal computers.
7. Electrical components used in assembling computers.
8. Wages of workers assembling personal computers
9. Soldering materials used on factory assembly line.
10. Salaries for the night security guards for the factory building.
Categories:
a. Direct materials
b. Direct labor
c. Manufacturing overhead
d. Period costs
Click here for the solution: Elder Company is a manufacturer of personal computers
Associate each cost/expense with each association category:
Cost and Expenses Association Categories
1. Property taxes on the factory building
2. Production superintendents’ salaries
3. Memory boards and chips used in assembling computers
4. Depreciation on the factory equipment.
5. Salaries for assembly line quality control inspectors
6. Sales commissions paid to sell personal computers.
7. Electrical components used in assembling computers.
8. Wages of workers assembling personal computers
9. Soldering materials used on factory assembly line.
10. Salaries for the night security guards for the factory building.
Categories:
a. Direct materials
b. Direct labor
c. Manufacturing overhead
d. Period costs
Click here for the solution: Elder Company is a manufacturer of personal computers
Bjerg Corporation incurred several costs
E2-7 Bjerg Corporation incurred several costs. Prepare entries for manufacturing costs. Journalize the following transactions.
1. Purchased raw materials on account $46,300
2. Raw Materials of $36,000 were requisitioned to the factory. An analysis of the materials requisition slips indicates that $6,800 was classified as indirect materials.
3. Factory labor costs incurred were $53,900, of which $49,000 pertained to factory wages payable and $4,900 pertained to employer payroll taxes payable.
4. Time tickets indicated that $48,000 was direct labor and $5,900 was indirect labor.
5. Overhead costs incurred on account were $80,500.
6. Manufacturing overhead was applied at the rate of 150% of direct labor cost.
7. Goods costing $88,000 were completed and transferred to finished goods.
8. Finished goods costing $75,000 to manufacture were sold on account for $103,000
Click here for the solution: Bjerg Corporation incurred several costs
1. Purchased raw materials on account $46,300
2. Raw Materials of $36,000 were requisitioned to the factory. An analysis of the materials requisition slips indicates that $6,800 was classified as indirect materials.
3. Factory labor costs incurred were $53,900, of which $49,000 pertained to factory wages payable and $4,900 pertained to employer payroll taxes payable.
4. Time tickets indicated that $48,000 was direct labor and $5,900 was indirect labor.
5. Overhead costs incurred on account were $80,500.
6. Manufacturing overhead was applied at the rate of 150% of direct labor cost.
7. Goods costing $88,000 were completed and transferred to finished goods.
8. Finished goods costing $75,000 to manufacture were sold on account for $103,000
Click here for the solution: Bjerg Corporation incurred several costs
Allen Labinski has prepared the following list of statements about process cost accounting
E3-1 Allen Labinski has prepared the following list of statements about process cost accounting. Identify each statement as true or false. If false, indicate how to correct the statement.
1. Process cost systems are used to apply costs to similar products that are mass-produced in a continuous fashion.
2. A process cost system is used when each finished unit is indistinguishable from another.
3. Companies that produce soft drinks, motion pictures, and computers chips would all use process cost accounting.
4. In a process cost system, costs are tracked by individual jobs.
5. Job order costing and process costing track different manufacturing costs elements.
6. Both job order costing and process costing account for direct materials, direct labor, and manufacturing overhead.
7. Costs flow through the accounts in the same basic way for both job order costing and process costing.
8. In a process cost system, only one work in process account is used.
9. In a process cost system, costs are summarized in a job cost sheet.
10. In a process cost system, the unit cost is total manufacturing costs for the period divided by the units produced during the period.
NOTE: Fill in the table below with your responses; write correction for false statements below the table:
Click here for the solution: Allen Labinski has prepared the following list of statements about process cost accounting
1. Process cost systems are used to apply costs to similar products that are mass-produced in a continuous fashion.
2. A process cost system is used when each finished unit is indistinguishable from another.
3. Companies that produce soft drinks, motion pictures, and computers chips would all use process cost accounting.
4. In a process cost system, costs are tracked by individual jobs.
5. Job order costing and process costing track different manufacturing costs elements.
6. Both job order costing and process costing account for direct materials, direct labor, and manufacturing overhead.
7. Costs flow through the accounts in the same basic way for both job order costing and process costing.
8. In a process cost system, only one work in process account is used.
9. In a process cost system, costs are summarized in a job cost sheet.
10. In a process cost system, the unit cost is total manufacturing costs for the period divided by the units produced during the period.
NOTE: Fill in the table below with your responses; write correction for false statements below the table:
Click here for the solution: Allen Labinski has prepared the following list of statements about process cost accounting
Tharp and Kostrivas is a law firm that is initiating an activity-based costing system
E4-16 Tharp and Kostrivas is a law firm that is initiating an activity-based costing system. Ben Tharp, the senior partner and strong supporter of ABC, has prepared the following list of activities performed by a typical attorney in a day at the firm. Classify each of the activities listed by Ben Tharp as value-added or non-value-added and defend your classification. How much was value-added and how much was non-value-added?
Activities Hours
Writing contracts and letters 1.0
Attending staff meetings 0.5
Taking depositions 1.0
Doing research 1.0
Traveling to/from court 1.0
Contemplating legal strategy 1.0
Eating lunch 1.0
Litigating a case in course 2.5
Entertaining a prospective client 2.0
Click here for the solution: Tharp and Kostrivas is a law firm that is initiating an activity-based costing system
Activities Hours
Writing contracts and letters 1.0
Attending staff meetings 0.5
Taking depositions 1.0
Doing research 1.0
Traveling to/from court 1.0
Contemplating legal strategy 1.0
Eating lunch 1.0
Litigating a case in course 2.5
Entertaining a prospective client 2.0
Click here for the solution: Tharp and Kostrivas is a law firm that is initiating an activity-based costing system
(Identify the costs below as variable, fixed, or mixed) Moctezuma Furniture Corporation incurred the following costs
Identify the costs below as variable, fixed, or mixed.
E5-4 Moctezuma Furniture Corporation incurred the following costs.
1. Wood used in the production of furniture.
2. Fuel used in delivery trucks.
3. Straight-line depreciation on factory building.
4. Screws used in the production of furniture.
5. Sales staff salaries.
6. Sales commissions.
7. Property taxes.
8. Insurance on buildings
9. Hourly wages of furniture craftsmen.
10. Salaries of factory supervisors.
11. Utilities expense.
Click here for the solution: (Identify the costs below as variable, fixed, or mixed) Moctezuma Furniture Corporation incurred the following costs
E5-4 Moctezuma Furniture Corporation incurred the following costs.
1. Wood used in the production of furniture.
2. Fuel used in delivery trucks.
3. Straight-line depreciation on factory building.
4. Screws used in the production of furniture.
5. Sales staff salaries.
6. Sales commissions.
7. Property taxes.
8. Insurance on buildings
9. Hourly wages of furniture craftsmen.
10. Salaries of factory supervisors.
11. Utilities expense.
Click here for the solution: (Identify the costs below as variable, fixed, or mixed) Moctezuma Furniture Corporation incurred the following costs
(BA 225) The San Marcos Inn is trying to determine its break-even point
E6-1 The San Marcos Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $50 a night. Operating costs are as follows: Costs Amount Salaries $8,500 per month Utilities 2,000 per month Depreciation 1,000 per month Maintenance 500 per month Maid service 5 per room Other costs 33 per room
(a) Determine the inn’s break-even point in 1. Number of rented rooms per month and 2. Dollars
(b) If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is 1. The monthly margin of safety in dollars and 2. The margin of safety ratio
Click here for the solution: (BA 225) The San Marcos Inn is trying to determine its break-even point
(a) Determine the inn’s break-even point in 1. Number of rented rooms per month and 2. Dollars
(b) If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is 1. The monthly margin of safety in dollars and 2. The margin of safety ratio
Click here for the solution: (BA 225) The San Marcos Inn is trying to determine its break-even point
(Cost of trade credit) Calculate the cost of skipping the discount and paying at the end of the net period for each of the following credit terms
A14. (Cost of trade credit) Calculate the cost of skipping the discount and paying at the end of the net period for each of the following credit terms. Calculate the APR and the APY.
a. 5/10, net 50
b. 3/15, net 30
c. 2/10, net 20
Click here for the solution: Calculate the cost of skipping the discount and paying at the end of the net period for each of the following credit terms
a. 5/10, net 50
b. 3/15, net 30
c. 2/10, net 20
Click here for the solution: Calculate the cost of skipping the discount and paying at the end of the net period for each of the following credit terms
The management of Sharrar Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity
The management of Sharrar Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 45,000 machine- hours. In addition, capacity is 52,000 machine-hours and the actual activity for the year is 47,100 machine-hours. All of the manufacturing overhead is fixed and is $1,029,600 per year. For simplicity, it’s assumed that this is the esti- mated manufacturing overhead for the year as well as the manufacturing overhead at capacity and the actual amount of manufacturing overhead for the year.
Required:
A. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated amount of the allocation base.
B. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the estimated amount of the allocation base.
C. Determine the predetermined overhead rate if the predetermined overhead rate is based on the amount of the allocation base at capacity.
D. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base at capacity.
Click here for the solution: The management of Sharrar Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity
Required:
A. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated amount of the allocation base.
B. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the estimated amount of the allocation base.
C. Determine the predetermined overhead rate if the predetermined overhead rate is based on the amount of the allocation base at capacity.
D. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base at capacity.
Click here for the solution: The management of Sharrar Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity
1. Since overhead costs are indirect costs, _______. (Points : 1)
1. Since overhead costs are indirect costs, _______. (Points : 1)
2. An actual cost system differs from a normal cost system in that an actual cost system ______. (Points : 1)
3. One reason annual overhead application rates are used is ______. (Points : 1)
4. When a manufacturing company has a highly automated manufacturing plant producing many different products, which of the following is the more appropriate basis of applying manufacturing overhead costs to work in process? (Points : 1)
5. In the formula y = a + bX, y represents _______. (Points : 1)
6. If the level of activity increases, _______. (Points : 1)
7. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a _______. (Points : 1)
8. Reno Corporation uses a predetermined overhead application rate of $.30 per direct labor hour. During the year it incurred $345,000 dollars of actual overhead, but it planned to incur $360,000 of overhead. The company applied $363,000 of overhead during the year. How many direct labor hours did the company plan to incur? (Points : 1)
9. Gary Corporation has developed the following flexible budget formula for monthly overhead:
For output of less than 200,000 units: $36,600 + $.80(units)
For output of 200,000 units or more: $43,000 + $.80(units)
How much overhead should Gary expect if the firm plans to produce 200,000 units? (Points : 1)
10. Aztec Company is relocating its facilities. The company estimates that it will take three trucks to move office contents. If the per truck rental charge is $1,000 plus 25 cents per mile, what is the expected cost to move 800 miles? (Points : 1)
11. Aquatic Motor Company is exploring different prediction models that can be used to forecast indirect labor costs. One independent variable under consideration is machine hours. Following are matching observations on indirect labor costs and machine hours for the past six months:
Month Machine hours Indirect labor costs
1 300 $20,000
2 400 $24,000
3 240 $17,000
4 370 $22,000
5 200 $13,000
6 225 $14,000
In a high-low model, which months' observations would be used to compute the model's parameters? (Points : 1)
12. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in _______. (Points : 1)
13. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the _______. (Points : 1)
14. The FASB requires which of the following to be used in preparation of external financial statements? (Points : 1)
15. An ending inventory valuation on an absorption costing balance sheet would _______. (Points : 1)
16. Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated? (Points : 1)
17. The costing system that classifies costs by functional group only is _______. (Points : 1)
18. The costing system that classifies costs by both functional group and behavior is _______. (Points : 1)
19. Another name for variable costing is _______. (Points : 1)
20. If a firm uses variable costing, fixed manufacturing overhead will be included _______. (Points : 1)
Click here for the solution: 1. Since overhead costs are indirect costs, _______. (Points : 1)
2. An actual cost system differs from a normal cost system in that an actual cost system ______. (Points : 1)
3. One reason annual overhead application rates are used is ______. (Points : 1)
4. When a manufacturing company has a highly automated manufacturing plant producing many different products, which of the following is the more appropriate basis of applying manufacturing overhead costs to work in process? (Points : 1)
5. In the formula y = a + bX, y represents _______. (Points : 1)
6. If the level of activity increases, _______. (Points : 1)
7. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a _______. (Points : 1)
8. Reno Corporation uses a predetermined overhead application rate of $.30 per direct labor hour. During the year it incurred $345,000 dollars of actual overhead, but it planned to incur $360,000 of overhead. The company applied $363,000 of overhead during the year. How many direct labor hours did the company plan to incur? (Points : 1)
9. Gary Corporation has developed the following flexible budget formula for monthly overhead:
For output of less than 200,000 units: $36,600 + $.80(units)
For output of 200,000 units or more: $43,000 + $.80(units)
How much overhead should Gary expect if the firm plans to produce 200,000 units? (Points : 1)
10. Aztec Company is relocating its facilities. The company estimates that it will take three trucks to move office contents. If the per truck rental charge is $1,000 plus 25 cents per mile, what is the expected cost to move 800 miles? (Points : 1)
11. Aquatic Motor Company is exploring different prediction models that can be used to forecast indirect labor costs. One independent variable under consideration is machine hours. Following are matching observations on indirect labor costs and machine hours for the past six months:
Month Machine hours Indirect labor costs
1 300 $20,000
2 400 $24,000
3 240 $17,000
4 370 $22,000
5 200 $13,000
6 225 $14,000
In a high-low model, which months' observations would be used to compute the model's parameters? (Points : 1)
12. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in _______. (Points : 1)
13. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the _______. (Points : 1)
14. The FASB requires which of the following to be used in preparation of external financial statements? (Points : 1)
15. An ending inventory valuation on an absorption costing balance sheet would _______. (Points : 1)
16. Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated? (Points : 1)
17. The costing system that classifies costs by functional group only is _______. (Points : 1)
18. The costing system that classifies costs by both functional group and behavior is _______. (Points : 1)
19. Another name for variable costing is _______. (Points : 1)
20. If a firm uses variable costing, fixed manufacturing overhead will be included _______. (Points : 1)
Click here for the solution: 1. Since overhead costs are indirect costs, _______. (Points : 1)
Fill in the blanks for each of the following independent cases
2-29 Basic Review Exercises
Fill in the blanks for each of the following independent cases:
(a) (b) (c) (d) (e)
Selling Variable Total Total Total (f)
Price Cost Units Contribution Fixed Net
Case per Unit per Unit Sold Margin Costs Income
1 $25 $— 120,000 $720,000 $640,000 $ —
2 10 6 100,000 — 320,000 —
3 20 15 — 100,000 — 15,000
4 30 20 70,000 — — 12,000
5 — 9 80,000 160,000 110,000 —
Click here for the solution: Fill in the blanks for each of the following independent cases
Fill in the blanks for each of the following independent cases:
(a) (b) (c) (d) (e)
Selling Variable Total Total Total (f)
Price Cost Units Contribution Fixed Net
Case per Unit per Unit Sold Margin Costs Income
1 $25 $— 120,000 $720,000 $640,000 $ —
2 10 6 100,000 — 320,000 —
3 20 15 — 100,000 — 15,000
4 30 20 70,000 — — 12,000
5 — 9 80,000 160,000 110,000 —
Click here for the solution: Fill in the blanks for each of the following independent cases
Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
E16-30 (Stock-Appreciation Rights) Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2008, on 40,000 SARs. The date of grant is December 31, 2008, and the required employment (service) period is 4 years. President Scott exercises all of the SARs in 2014. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2009; $9 on December 31, 2010; $15 on December 31, 2011; $8 on December 31, 2012; and $18 on December 31, 2013.
(a) Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to President Scott.
(b) Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.
Click here for the solution: Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
(a) Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to President Scott.
(b) Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.
Click here for the solution: Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
The following data are taken from the statement of affairs of the Monroe Company
Chapter 10 Exercise 6 The following data are taken from the statement of affairs of the Monroe Company. (Assume that the realizable values of assets are accurate.)
Assets pledged with fully secured creditors (realizable value, $190,000) $240,000
Assets pledged with partially secured creditors (realizable value, $90,000) $110,000
Free assets (realizable value, $102,000) $160,000
Fully secured creditor claims $91,000
Partially secured creditor claims $120,000
Unsecured creditor claims with priority $30,000
General unsecured creditor claims $350,000
Compute the amount that will be paid to each class of creditor.
Click here for the solution: The following data are taken from the statement of affairs of the Monroe Company
Assets pledged with fully secured creditors (realizable value, $190,000) $240,000
Assets pledged with partially secured creditors (realizable value, $90,000) $110,000
Free assets (realizable value, $102,000) $160,000
Fully secured creditor claims $91,000
Partially secured creditor claims $120,000
Unsecured creditor claims with priority $30,000
General unsecured creditor claims $350,000
Compute the amount that will be paid to each class of creditor.
Click here for the solution: The following data are taken from the statement of affairs of the Monroe Company
Tuesday, April 12, 2016
(Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns
P6-2 (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.
(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of $90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?
(b) Robert Hitchcock is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays. What annual deposit must Robert make if the fund will earn 12% interest compounded annually?
(c) Diane Ross has $20,000 to invest today at 9% to pay a debt of $47,347. How many years will it take her to accumulate enough to liquidate the debt?
(d) Cindy Houston has a $27,600 debt that she wishes to repay 4 years from today; she has $19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?
Click here for the solution: (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns
(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of $90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?
(b) Robert Hitchcock is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays. What annual deposit must Robert make if the fund will earn 12% interest compounded annually?
(c) Diane Ross has $20,000 to invest today at 9% to pay a debt of $47,347. How many years will it take her to accumulate enough to liquidate the debt?
(d) Cindy Houston has a $27,600 debt that she wishes to repay 4 years from today; she has $19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?
Click here for the solution: (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns
Suppose Daimler Chrysler is considering which of two emission testing devices to buy
B10. (Replacement cycles) Suppose Daimler Chrysler is considering which of two emission testing devices to buy. Machine A costs $100,000, has a five-year useful life, and has operating expenses of $40,000 per year. Machine B costs $36,000, has a six-year useful life, and has operating expenses of $62,000 per year. Both machines will have zero salvage value, revenues of $85,000 per year, and straight-line depreciation to a zero book value, and both will be replaced at the end of their lives. Daimler Chrysler’s tax rate is 35%.
a. Assume a 12% cost of capital for each machine. Which one should Daimler Chrysler buy?
b. Suppose instead that machine A requires a higher cost of capital, 15%, because it’s a riskier process. Machine B’s cost of capital is still 12%. Which machine should Daimler Chrysler buy?
Click here for the solution: Suppose Daimler Chrysler is considering which of two emission testing devices to buy
a. Assume a 12% cost of capital for each machine. Which one should Daimler Chrysler buy?
b. Suppose instead that machine A requires a higher cost of capital, 15%, because it’s a riskier process. Machine B’s cost of capital is still 12%. Which machine should Daimler Chrysler buy?
Click here for the solution: Suppose Daimler Chrysler is considering which of two emission testing devices to buy
At a seminar, a cost accountant spoke on identification of different kinds of cost behavior
3-B1 Identifying Cost Behavior Patterns
At a seminar, a cost accountant spoke on identification of different kinds of cost behavior. Tammy Li, a hospital administrator who heard the lecture, identified several hospital costs of concern to her. After her classification, Li presented you with the following list of costs and asked you to (1) classify their behavior as one of the following: variable, step, mixed, discretionary fixed, committed fixed, and (2) to identify a likely cost driver for each variable or mixed cost.
1. Operating costs of X-ray equipment ($95,000 a year plus $3 per film)
2. Health insurance for all full-time employees
3. Costs incurred by Dr. Rath in cancer research
4. Repairs made on hospital furniture
5. Training costs of an administrative resident
6. Straight-line depreciation of operating room equipment
7. Costs of services of King Hospital Consulting
8. Nursing supervisors’ salaries (a supervisor is needed for each 45 nursing personnel)
Click here for the solution: At a seminar, a cost accountant spoke on identification of different kinds of cost behavior
At a seminar, a cost accountant spoke on identification of different kinds of cost behavior. Tammy Li, a hospital administrator who heard the lecture, identified several hospital costs of concern to her. After her classification, Li presented you with the following list of costs and asked you to (1) classify their behavior as one of the following: variable, step, mixed, discretionary fixed, committed fixed, and (2) to identify a likely cost driver for each variable or mixed cost.
1. Operating costs of X-ray equipment ($95,000 a year plus $3 per film)
2. Health insurance for all full-time employees
3. Costs incurred by Dr. Rath in cancer research
4. Repairs made on hospital furniture
5. Training costs of an administrative resident
6. Straight-line depreciation of operating room equipment
7. Costs of services of King Hospital Consulting
8. Nursing supervisors’ salaries (a supervisor is needed for each 45 nursing personnel)
Click here for the solution: At a seminar, a cost accountant spoke on identification of different kinds of cost behavior
Ethics Case: It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements
Ethics Case 1-8 The auditors’ responsibility
It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.
Some feel that it is impossible for an auditor to give an independent opinion on a company's financial statement because the auditors' fees for performing the audit are paid for by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns.
How might an auditor's ethics be challenged while performing an audit?
Click here for the solution: Ethics Case: It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements
It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.
Some feel that it is impossible for an auditor to give an independent opinion on a company's financial statement because the auditors' fees for performing the audit are paid for by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns.
How might an auditor's ethics be challenged while performing an audit?
Click here for the solution: Ethics Case: It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements
International Reporting Case: Sepracor, Inc., a U.S. drug company, reported the following information
International Reporting Case
Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.
2007 (,000)
Current Liabilities $ 554,114
Convertible Subordinated Debt 648,020
Total Liabilities 1,228,313
Stockholders’ Equity 176,413
Net Income 58,333
Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, Financial Instruments, convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.
INSTRUCTIONS:
(a) Compute the following rations for Sepracor, Inc. (assume that year-end balances approximate annual averages.)
(1) Return on assets.
(2) Return on stockholders’ equity
(3) Debt to asset ratio
(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company's 5% convertible bonds? Explain.
(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor's convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer
Click here for the solution: International Reporting Case: Sepracor, Inc., a U.S. drug company, reported the following information
Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.
2007 (,000)
Current Liabilities $ 554,114
Convertible Subordinated Debt 648,020
Total Liabilities 1,228,313
Stockholders’ Equity 176,413
Net Income 58,333
Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, Financial Instruments, convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.
INSTRUCTIONS:
(a) Compute the following rations for Sepracor, Inc. (assume that year-end balances approximate annual averages.)
(1) Return on assets.
(2) Return on stockholders’ equity
(3) Debt to asset ratio
(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company's 5% convertible bonds? Explain.
(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor's convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer
Click here for the solution: International Reporting Case: Sepracor, Inc., a U.S. drug company, reported the following information
The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology
Market vs Book Value: The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested $200,000 in setting up a production plant. He believes that he could sell his patent for $50 million.
a. What are the book value and market value of the firm?
b. If there are 2 million shares of stock in the new corporation, what would be the price per share and the book value per share?
Click here for the solution: The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology
a. What are the book value and market value of the firm?
b. If there are 2 million shares of stock in the new corporation, what would be the price per share and the book value per share?
Click here for the solution: The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology
The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010
E21-2 Lessee Accounting Issues
The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provision, and related events are as follows:
a)The lease term is five years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.
b)The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value.
c) Sax Company agrees to pay all executor costs.
d) The lease contains no renewal or bargain purchase option.
e) The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
f) Sax Company uses the straight-line method to record depreciation on similar equipment.
REQUIRED:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar).
Click here for the solution: The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010
The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provision, and related events are as follows:
a)The lease term is five years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.
b)The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value.
c) Sax Company agrees to pay all executor costs.
d) The lease contains no renewal or bargain purchase option.
e) The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
f) Sax Company uses the straight-line method to record depreciation on similar equipment.
REQUIRED:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar).
Click here for the solution: The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010
The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee
E21-9 Lessee and Lessor Accounting Issues
The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the ginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.
REQUIRED:
1. Record the lease (including the initial receipt of $2,000) and the receipt of the second and third installments of $2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.
Click here for the solution: The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee
The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the ginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.
REQUIRED:
1. Record the lease (including the initial receipt of $2,000) and the receipt of the second and third installments of $2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.
Click here for the solution: The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee
On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease
P21-1 Determining Type of Lease and Subsequent Accounting
On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay all executor costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is 305,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $64,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. During 2010, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method both companies.
REQUIRED:
1.Identify the type of lease involved for Alice Company and Superior Equipment Company and give reasons for your classifications.
2.Prepare appropriate journal entries for 2010 for the lessee and lessor.
3.If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.
Click here for the solution: On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease
On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay all executor costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is 305,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $64,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. During 2010, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method both companies.
REQUIRED:
1.Identify the type of lease involved for Alice Company and Superior Equipment Company and give reasons for your classifications.
2.Prepare appropriate journal entries for 2010 for the lessee and lessor.
3.If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.
Click here for the solution: On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease
Advance Accounting Exam: 1. When the parent company sells a portion of its investment in a subsidiary
Advance Accounting Exam
1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a (Points : 10)
2. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets (Points : 10)
3. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased: (Points : 10)
4. Which statement with respect to gains and losses on troubled debt restructuring is correct? (Points : 10)
5. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to: (Points : 10)
6. Assets transferred by the debtor to a creditor to settle a debt are transferred at: (Points : 10)
7. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring: (Points : 10)
8. The major difference between IFRS and US GAAP in accounting for inventories is that (Points : 10)
9. Accounting under IFRS and US GAAP is similar for all of the following topics except (Points : 10)
10. One difference between IFRS and GAAP in valuing inventories is that (Points : 10)
11. Accounting terminology that differs between IFRS and US GAAP include all of the following except (Points : 10)
12. A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a: (Points : 10)
13. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract: (Points : 10)
14. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to: (Points : 10)
15. An indirect exchange rate quotation is one in which the exchange rate is quoted: (Points : 10)
16. If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed? (Points : 10)
17. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the: (Points : 10)
18. The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called: (Points : 10)
19. In considering interim financial reporting, how did the Accounting Principles Board conclude that each reporting should be viewed? (Points : 10)
20. Current authoritative pronouncements require the disclosure of segment information when certain criteria are met. Which of the following reflects the type of firm and type of financial statement for which this disclosure is required? (Points : 10)
21. If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year, when should they be expensed? (Points : 10)
22. During the second quarter of 2011, Dodge Company sold a piece of equipment at a gain of $90,000. What portion of the gain should Dodge report in its income statement for the second quarter of 2011? (Points : 10)
23. Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000, respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Jerry is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the amount of Jerry’s investment can best be justified by which of the following? (Points : 10)
24. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation, the partnership incurs a $20,000 loss. The partners should share the losses (Points : 10)
25. In a partnership, interest on capital investment is accounted for as a(n) (Points : 10)
26. The profit and loss sharing ratio should be (Points : 10)
27. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of $70,000, and a current fair value of $110,000. The partners share net income and loss equally. The net debit to Karr's account (including any gain or loss on disposal of the machine) is (Points : 10)
28. A schedule prepared each time cash is to be distributed is called a(n) (Points : 10)
29. Offsetting a partner's loan balance against his debit capital balance is referred to as the (Points : 10)
30. If a partner with a debit capital balance during liquidation is personally solvent, the (Points : 10)
Click here for the solution: Advance Accounting Exam
1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a (Points : 10)
2. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets (Points : 10)
3. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased: (Points : 10)
4. Which statement with respect to gains and losses on troubled debt restructuring is correct? (Points : 10)
5. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to: (Points : 10)
6. Assets transferred by the debtor to a creditor to settle a debt are transferred at: (Points : 10)
7. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring: (Points : 10)
8. The major difference between IFRS and US GAAP in accounting for inventories is that (Points : 10)
9. Accounting under IFRS and US GAAP is similar for all of the following topics except (Points : 10)
10. One difference between IFRS and GAAP in valuing inventories is that (Points : 10)
11. Accounting terminology that differs between IFRS and US GAAP include all of the following except (Points : 10)
12. A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a: (Points : 10)
13. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract: (Points : 10)
14. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to: (Points : 10)
15. An indirect exchange rate quotation is one in which the exchange rate is quoted: (Points : 10)
16. If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed? (Points : 10)
17. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the: (Points : 10)
18. The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called: (Points : 10)
19. In considering interim financial reporting, how did the Accounting Principles Board conclude that each reporting should be viewed? (Points : 10)
20. Current authoritative pronouncements require the disclosure of segment information when certain criteria are met. Which of the following reflects the type of firm and type of financial statement for which this disclosure is required? (Points : 10)
21. If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year, when should they be expensed? (Points : 10)
22. During the second quarter of 2011, Dodge Company sold a piece of equipment at a gain of $90,000. What portion of the gain should Dodge report in its income statement for the second quarter of 2011? (Points : 10)
23. Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000, respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Jerry is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the amount of Jerry’s investment can best be justified by which of the following? (Points : 10)
24. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation, the partnership incurs a $20,000 loss. The partners should share the losses (Points : 10)
25. In a partnership, interest on capital investment is accounted for as a(n) (Points : 10)
26. The profit and loss sharing ratio should be (Points : 10)
27. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of $70,000, and a current fair value of $110,000. The partners share net income and loss equally. The net debit to Karr's account (including any gain or loss on disposal of the machine) is (Points : 10)
28. A schedule prepared each time cash is to be distributed is called a(n) (Points : 10)
29. Offsetting a partner's loan balance against his debit capital balance is referred to as the (Points : 10)
30. If a partner with a debit capital balance during liquidation is personally solvent, the (Points : 10)
Click here for the solution: Advance Accounting Exam
Monday, March 21, 2016
Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients
Problem 11-25 Effects of operating leverage on profitability
Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense CTS incurs is instructor salaries; it pays instructors $3,600 per course taught. CTS recently agreed to offer a course of instruction to the employees of Akers Incorporated at a price of $340 per student. Akers estimated that 20 students would attend the course.
Base your answer on the preceding information.
Part 1:
Required
a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?
b. Determine the profit, assuming that 20 students attend the course.
c. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
e. Explain why a 20 percent shift in enrollment produces more than a 20 percent shift in profitability. Use the term that identifies this phenomenon.
Click here for the solution: Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients
Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense CTS incurs is instructor salaries; it pays instructors $3,600 per course taught. CTS recently agreed to offer a course of instruction to the employees of Akers Incorporated at a price of $340 per student. Akers estimated that 20 students would attend the course.
Base your answer on the preceding information.
Part 1:
Required
a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?
b. Determine the profit, assuming that 20 students attend the course.
c. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
e. Explain why a 20 percent shift in enrollment produces more than a 20 percent shift in profitability. Use the term that identifies this phenomenon.
Click here for the solution: Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients
On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point
E7-5 (Record sales gross and net) On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for balance due from Chester Company.
Instructions
a) Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.
Sales and receivables are entered at gross selling price.
Sales and receivables are entered at net of cash discounts.
b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.
Click here for the solution: On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point
Instructions
a) Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.
Sales and receivables are entered at gross selling price.
Sales and receivables are entered at net of cash discounts.
b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.
Click here for the solution: On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n /60, f.o.b. shipping point
Derrick Adkins Construction Company began operations in 2007
E18-10 (Long-Term Contract Reporting) Derrick Adkins Construction Company began operations in 2007. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at December 31, 2007, is expected to be completed in 2008.
Project Total Contract Price Billings through 12/31/07 Cash Collections through 12/31/07 Contract Costs Incurred through 12/31/07 Estimated Additional Costs to Complete
1 $ 560,000 $ 360,000 $340,000 $450,000 $140,000
2 670,000 220,000 210,000 126,000 504,000
3 500,000 500,000 440,000 330,000 –0–
$1,730,000 $1,080,000 $990,000 $906,000 $644,000
Derrick Adkins Construction Company uses the completed-contract method. Determine the amount of income or loss to be reported for each of the three projects in 2007.
Click here for the solution: Derrick Adkins Construction Company began operations in 2007
Project Total Contract Price Billings through 12/31/07 Cash Collections through 12/31/07 Contract Costs Incurred through 12/31/07 Estimated Additional Costs to Complete
1 $ 560,000 $ 360,000 $340,000 $450,000 $140,000
2 670,000 220,000 210,000 126,000 504,000
3 500,000 500,000 440,000 330,000 –0–
$1,730,000 $1,080,000 $990,000 $906,000 $644,000
Derrick Adkins Construction Company uses the completed-contract method. Determine the amount of income or loss to be reported for each of the three projects in 2007.
Click here for the solution: Derrick Adkins Construction Company began operations in 2007
Fong Sai-Yuk Company sells one product
E8-9 (Periodic versus Perpetual Entries) Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.
Jan 2 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each
Instructions
a.) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end of month closing entry to record cost of goods sol. A physical count indicates that ending inventory for January is 110 units.
b.) Compute gross profit using the periodic system.
c.) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.
d.) Compute gross profit using the perpetual system.
Click here for the solution: Fong Sai-Yuk Company sells one product
Jan 2 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each
Instructions
a.) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end of month closing entry to record cost of goods sol. A physical count indicates that ending inventory for January is 110 units.
b.) Compute gross profit using the periodic system.
c.) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.
d.) Compute gross profit using the perpetual system.
Click here for the solution: Fong Sai-Yuk Company sells one product
Presented below is information related to Blowfish radios for Hootie Company for the month of July
E8-16 (Compute FIFO, LIFO, Average-Cost-Periodic) Presented below is information related to Blowfish radios for Hootie Company for the month of July.
Date Transaction Units In Unit Cost Total Units Sold Sell Price Total
July 1 Balance 100 $4.10 $410
July 6 Purchase 800 $4.20 $3360
July 7 Sale 300 $7.00 $2100
July 10 Sale 300 $7.30 $2190
July 12 Purchase 400 $4.50 $1800
July 15 Sale 200 $7.40 $1480
July 18 Purchase 300 $4.60 $1380
July 22 Sale 400 $7.40 $2960
July 25 Purchase 500 $4.58 $2290
July 30 Sale 200 $7.50 $1500
2100 $9240 1400 $10,230
Instructions
a.) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions:
1.) FIFO
2.) LIFO
3.) Weighted-average round the average unit cost to the nearest one tenth of one cent
b.) Answer the following questions
1.) Which of the following methods used above all will yield the lowest figure for ending figure for gross profit for the income statement? Why?
2.) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Why?
Click here for the solution: Presented below is information related to Blowfish radios for Hootie Company for the month of July
Date Transaction Units In Unit Cost Total Units Sold Sell Price Total
July 1 Balance 100 $4.10 $410
July 6 Purchase 800 $4.20 $3360
July 7 Sale 300 $7.00 $2100
July 10 Sale 300 $7.30 $2190
July 12 Purchase 400 $4.50 $1800
July 15 Sale 200 $7.40 $1480
July 18 Purchase 300 $4.60 $1380
July 22 Sale 400 $7.40 $2960
July 25 Purchase 500 $4.58 $2290
July 30 Sale 200 $7.50 $1500
2100 $9240 1400 $10,230
Instructions
a.) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions:
1.) FIFO
2.) LIFO
3.) Weighted-average round the average unit cost to the nearest one tenth of one cent
b.) Answer the following questions
1.) Which of the following methods used above all will yield the lowest figure for ending figure for gross profit for the income statement? Why?
2.) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Why?
Click here for the solution: Presented below is information related to Blowfish radios for Hootie Company for the month of July
The trial balance before adjustment of Reba McIntyre Inc. shows the following balances
E7-9 (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Reba McIntyre Inc. shows the following balances.
Accounts Rec. $90,000 (DR.)
Allowance for Doubtful Accounts 1,750 (DR.)
Sales (all on credit) $680,000 (CR.)
Instructions: Given the entry for estimated bad debts assuming that the allowances is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
Click here for the solution: The trial balance before adjustment of Reba McIntyre Inc. shows the following balances
Accounts Rec. $90,000 (DR.)
Allowance for Doubtful Accounts 1,750 (DR.)
Sales (all on credit) $680,000 (CR.)
Instructions: Given the entry for estimated bad debts assuming that the allowances is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
Click here for the solution: The trial balance before adjustment of Reba McIntyre Inc. shows the following balances
On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114
P17-2 (Available-for-Sale Debt Securities) On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2015. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2012, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.
a. Prepare journal entry to record purchase of bonds on Jan. 1. (Assume bonds are classified as available-for-sale.)
b. Prepare the amortization schedule for the bonds.
c. Prepare the journal entries to record the semiannual interest on July 1, 2010, and Dec. 31, 2010.
d. If fair value of Aguirre bonds is $372,726 on Dec. 31, 2011, prepare the necessary adjusting entry. (Assume the securities fair value adjustment balance on Jan 1, 2011 is a debit of $3,375.)
e. Prepare journal entry to record the sale of the bonds on Jan 1, 2012.
Click here for the solution: On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114
a. Prepare journal entry to record purchase of bonds on Jan. 1. (Assume bonds are classified as available-for-sale.)
b. Prepare the amortization schedule for the bonds.
c. Prepare the journal entries to record the semiannual interest on July 1, 2010, and Dec. 31, 2010.
d. If fair value of Aguirre bonds is $372,726 on Dec. 31, 2011, prepare the necessary adjusting entry. (Assume the securities fair value adjustment balance on Jan 1, 2011 is a debit of $3,375.)
e. Prepare journal entry to record the sale of the bonds on Jan 1, 2012.
Click here for the solution: On January 1, 2010, Novotna Company purchased $400,000, 8% bonds of Aguirre Co for $369,114
At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
CA24-4 (Post-Balance Sheet Events) At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000 (representing 2,000,000 shares of $1 par common stock), and retained earnings of $2,000,000. Net sales for the year 2007 were $18,000,000, and net income was $800,000. As auditors of this company, you are making a review of subsequent events on February 13, 2008, and you find the following.
1. On February 3, 2008, one of Brandt’s customers declared bankruptcy. At December 31, 2007, this company owed Brandt $300,000, of which $40,000 was paid in January, 2008.
2. On January 18, 2008, one of the three major plants of the client burned.
3. On January 23, 2008, a strike was called at one of Brandt’s largest plants, which halted 30% of its production. As of today (February 13) the strike has not been settled.
4. A major electronics enterprise has introduced a line of products that would compete directly with Brandt’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Brandt’s products, but at a price 50% lower. Brandt officials say they will meet the lower prices, which are high enough to cover variable manufacturing and selling costs but which permit recovery of only a portion of fixed costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2007. This price had prevailed for 2 weeks, after release of an official market report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2, which was the level experienced over several years. On January 18, 2008, the price returned to $2, after public disclosure of an error in the official calculations of the prior December, correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 2007, was on a lower of cost or market basis.
6. On February 1, 2008, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of $1,200,000 of preferred stock.
Instructions
State in each case how the 2007 financial statements would be affected, if at all.
Click here for the solution: At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
1. On February 3, 2008, one of Brandt’s customers declared bankruptcy. At December 31, 2007, this company owed Brandt $300,000, of which $40,000 was paid in January, 2008.
2. On January 18, 2008, one of the three major plants of the client burned.
3. On January 23, 2008, a strike was called at one of Brandt’s largest plants, which halted 30% of its production. As of today (February 13) the strike has not been settled.
4. A major electronics enterprise has introduced a line of products that would compete directly with Brandt’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Brandt’s products, but at a price 50% lower. Brandt officials say they will meet the lower prices, which are high enough to cover variable manufacturing and selling costs but which permit recovery of only a portion of fixed costs.
5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2007. This price had prevailed for 2 weeks, after release of an official market report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2, which was the level experienced over several years. On January 18, 2008, the price returned to $2, after public disclosure of an error in the official calculations of the prior December, correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 2007, was on a lower of cost or market basis.
6. On February 1, 2008, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of $1,200,000 of preferred stock.
Instructions
State in each case how the 2007 financial statements would be affected, if at all.
Click here for the solution: At December 31, 2007, Angie Brandt Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account
E16-24 (Balance Sheet Classification)
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.
Click here for the solution: At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.
Click here for the solution: At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account
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