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

Listed below are several information characteristics and accounting principles and assumptions

1. (TCO A) Listed below are several information characteristics and accounting principles and assumptions. Match the letter of each with the appropriate phrase that states its application. (Points: 30)

1: Stable dollar assumption
2: Notes as part of necessary information to a fair presentation.
3: Earnings process completed and realized or realizable.
4: Valuing assets at amounts originally paid for them.
5: the impact of an item on the overall financial operations of a company.
6: Accruals and deferrals in adjusting and closing process (Do not use going concern).
7: Affairs of the business distinguished from those of its owners.
8: Presentation of error-free information with representational faithfulness
9: Business enterprise assumed to have a long life.
10: Cost of providing financial information versus the benefits derived from its use.

: Historical cost principle
: Going concern principle
: Matching principle
: Monetary unit
: Revenue recognition principle
: Full disclosure principle
: Reliability characteristic
: Cost-benefit relationship
: Materiality constraint
: Economic entity assumption

Click here for the solution: Listed below are several information characteristics and accounting principles and assumptions

Eastern Manufacturing is involved with several situations that possibly involve contingencies

P 13-6 Various contingencies

Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.

a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.

b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.

c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.

d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.

Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes.

Click here for the solution: Eastern Manufacturing is involved with several situations that possibly involve contingencies

Listed below are several terms and phrases associated with leases

E 15-25 Concepts; terminology

Listed below are several terms and phrases associated with leases. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

List A
___ 1. Effective rate times balance.
___ 2. Realization principle.
___ 3. Minimum lease payments plus unguaranteed residual value.
___ 4. Periodic lease payments plus lessee-guaranteed residual value.
___ 5. PV of minimum lease payments plus PV of unguaranteed residual value.
___ 6. Initial direct costs.
___ 7. Rent revenue.
___ 8. Bargain purchase option.
___ 9. Leasehold improvements.
___10. Cash to satisfy residual value guarantee.
___11. Capital lease expense.
___12. Deducted in lessor’s computation of lease payments.
___13. Title transfers to lessee.
___14. Contingent rentals.
___15. Lease payments plus lessee-guaranteed and third-part-guaranteed residual value.

List B
a. PV of BPO price.
b. Lessor’s net investment.
c. Lessor’s gross investment.
d. Operating lease.
e. Depreciable assets.
f. Loss to lessee.
g. Executory costs.
h. Depreciation longer than lessee term.
i. Disclosure only.
j. Interest expense.
k. Additional lessor conditions.
l. Lessee’s minimum lease payments.
m. Purchase price less than fair value.
n. Sales-type lease selling expense.
o. Lessor’s minimum lease payments.

Click here for the solution: Listed below are several terms and phrases associated with leases

For the past several years, Emily Page has operated a part-time consulting business from her home

PR 4-6A For the past several years, Emily Page has operated a part-time consulting business from her home. As of June 1, 2010, Emily decided to move to rented quarters and to operate the business, which was to be known as Bottom Line Consulting, on a full-time basis. Bottom Line Consulting entered into the following transactions during June:

June 1: The following assets were received from Emily Page: cash, $20,000; accounts receivable, $4,500, supplies, $2,000; and office equipment, $11,500. There were no liabilities received.
1. Paid three months rent on a lease rental contract, $6,000.
2. Paid the premiums on property casualty insurance policies, $2,400.

AND SO ON

Check: 8. Net Income $16,455

Click here for the solution: For the past several years, Emily Page has operated a part-time consulting business from her home

For several years, a number of Food Lion, Inc., grocery stores were unprofitable

For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of these impaired assets must be written down.

A recent Food Lion income statement reports a $9.5 million charge against income pertaining to the write-down of impaired assets.

Instructions
a. Explain why Food Lion must write down the current carrying value of its unprofitable stores.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.


Click here for the solution: For several years, a number of Food Lion, Inc., grocery stores were unprofitable

After securing lease commitments from several major stores, Auer Shopping Center, Inc was organized and built a shopping center in a growing suburb

After securing lease commitments from several major stores, Auer Shopping Center, Inc was organized and built a shopping center in a growing suburb. The shopping center would had opened on scheduled January 1, 2020 if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2010. All of the additional construction costs were incurred as a result of the tornado were covered by insurance.

In July 2009, in anticipation of the scheduled January opening a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space and manager the property. A summary of some of the costs incurred in 2009 and the firs nine months of 2010 follows:

2009 January 1, 2010 to September 30, 2010
Interest on Mortgage Bonds 720,000 540,000
Cost of obtaining tenants 300,000 360,000
Promotional Advertising 540,000 557,000

The promotional advertising campaign was designed to familiarize shoppers the center. Had it been known in time that the center would not open until October 2010, the 2009 expenditure would not had been made. The advertising had to be repeated in 2010 .
All of the tenants who had leased space in the shopping center at the time of the tornado had accepted the October occupancy date on condition the rental charge for the first 9 months of 2010 was cancelled.

Instructions:
Explain how each of the costs for 2009 and the first 9 months of 2010 should be treated in the accounts of the shopping center corporation. Give reasons for each treatment?


Click here for the solution: After securing lease commitments from several major stores, Auer Shopping Center, Inc was organized and built a shopping center in a growing suburb

Louder Company manufactures part MNO used in several of its truck models

Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:

Direct materials $ 45,000
Direct manufacturing labor 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000

Louder Company has the option of purchasing part MNO from an outside supplier at $11.20 per unit. If MNO is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

Question 1: What amount of the MNO production costs is avoidable?

Question 2: Should the company outsource MNO? Why or why not?

Question 3: What other items should the company consider before outsourcing any of the parts it manufactures?


Click here for the solution: Louder Company manufactures part MNO used in several of its truck models

4-56 The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs

4-56 (Analytical Review and Planning the Audit) The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs. The company is publicly held and is considered a small-to medium-size pharmaceutical company. Approximately 80% of its sales have been in prescription drugs; the remaining 20% are in medical supplies normally found in a drugstore. The primary purpose of the auditor’s calculations is to identify potential risk areas for the upcoming audit. The auditor recognizes that some of the data may signal the need to gather other industry- or company-specific data.

A number of the company’s drugs are patented. Its number-one selling drug, Anecillin, which will come off of patent in two years, has accounted for approximately 20% of the company's sales ‘during the past five years.

INDIANOLA PHARMACEUTICAL RATIO ANALYSIS

Ratio Current One Year Two Years Three Years Current
Year Previous Previous Previous Industry
Current ratio -----1.85 1.89 2.28 2.51 2.13
Quick ratio ------------------------------- 0.85 0.93 1.32 1.76 1.40
Interest coverage:
Times Interest earned------------------- 1.30 1.45 5.89 6.3 4.50
Days’ sales in receivables-------------- 109 96 100 72 69
Inventory turnover---------------------- 2.40 2.21 3.96 5.31 4.33
Days’ sales in inventory---------------- 152 165 92 69 84
Research & development as a
Percent of sales -------------------------- 1.3 1.4 1.94 2.03 4.26
Cost of goods sold as percent
Of sales------------------------------------ 38.5 40.2 41.2 43.8 44.5
Debt/equity ratio------------------------- 4.85 4.88 1.25 1.13 1.25
Earnings per share----------------------- $1.12 $2.50 $4.32 $4.26 n/a
Sales/tangible assets--------------------- 0.68 0.64 0.89 0.87 0.99
Sales/total assets------------------------- 0.33 0.35 0.89 0.87 0.78
Sales growth over past year---- 3% 15% 2% 4% 6%

Required
a. What major conclusions regarding financial reporting risk can be drawn from the information show in the table? Be specific in identifying specific account balances that have a high risk of misstatement. State how that risk analysis will be used in planning the audit. Be very specific in your answer. You should identify a minimum of four financial reporting risks that should be addressed during the audit and how they should be addressed.
b. What other critical background information might you want to obtain as part of the planning of the audit or would you gather during the conduct of the audit? Briefly indicate the probable sources of the information.
c. Based on the information, what major actions did the company take during the immediately preceding year? Explain.


Click here for the solution: The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs

Presented here are several transactions and events of the General Fund of Johnson County

3–10. Presented here are several transactions and events of the General Fund of Johnson County. All transactions and events relate to calendar year 2009.

1. Estimated revenues from the following sources were legally budgeted.
Sales taxes $ 6,000,000
Fines and forfeits 2,000,000
Licenses and permits 1,750,000
Intergovernmental revenues 350,000
Total $10,100,000

2. Appropriations for the following functions were legally budgeted .
General government $2,100,000
Public safety 3,890,000
Culture and recreation 700,000
Health and welfare 3,000,000
Total $9,690,000

3. During the year, revenues were received in cash from the following sources:
Sales taxes $ 5,930,000
Fines and forfeits 1,990,000
Licenses and permits 1,740,000
Intergovernmental revenues 385,000
Total $10,045,000

4. During the year, contracts and purchase orders were issued as follows:
General government $ 450,000
Public safety 800,000
Culture and recreation 280,000
Health and welfare 500,000
Total $2,030,000

5. Goods and services (these are a portion of the total ordered in transaction 4) were received, as follows:
Estimated Actual
General government $ 450,000 $ 452,000
Public safety 500,000 510,000
Culture and recreation 275,000 276,000
Health and welfare 500,000 500,000
Total $1,725,000 $1,738,000

6. A budget revision was approved by the County Commission. Estimated revenues for intergovernmental revenues were increased by $35,000. Appropriations for general government were increased by $100,000.

7. Vouchers were issued for items not previously encumbered, primarily personal services, in the following amounts:
General government $1,747,000
Public safety 3,080,000
Culture and recreation 418,000
Health and welfare 2,500,000
Total $7,745,000

a. Record the transactions in general journal form. Include subsidiary accounts as illustrated in this chapter.
b. Open budgetary, revenue, expenditure, and encumbrance general ledger control accounts and post the transactions. You may use T-accounts.
c. Open Revenue and Appropriations, Expenditures, and Encumbrances subsidiary ledgers. Post the transactions. Prove that the control account balances agree with the related subsidiary ledger accounts.
d. Assume a beginning Fund Balance—Unreserved of $150,000. Prepare a budgetary comparison schedule for the General Fund. Include encumbrances with expenditures. Use Illustration 3–4 as an example.
e. Assuming that encumbered appropriations do not lapse at the end of the budget year, how much of the 2009 appropriations, by function, did lapse at the end of 2009? Show computations in good form.


Click here for the solution: Presented here are several transactions and events of the General Fund of Johnson County

Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

Auditing P 5-27 Sarah Robertson, CPA had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2008, Herb Majestic told her that he needed a large bank loan to "tide him over" until sales picked up as expected late 2009. In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will "be his solution"-he was sure he will get it as long as the financial statements don't look too bad. Robertson stated that she believed the statements will have to include a going concern explanatory paragraph, Majestic said that this wasn't needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan. Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2009. The bank sued Sarah Robertson for fraud. Required: Indicate whether or not you think the bank will succeed. Support your answer.


Click here for the solution: Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

For the past several years, Sara Keith has operated a part-time consulting business from her home

ACC 1800 – Accounting Procedures
Fall 2011 - Comprehensive Problem

For the past several years, Sara Keith has operated a part-time consulting business from her home. As of June 1, 2011, Sara decided to move to rented quarters and to operate the business, which was to be known as S&K Consulting, on a full-time basis. S&K Consulting entered into the following transactions during June:

June 1 The following assets were received from Sara Keith: cash, $20,000; accounts receivable, $4,500; supplies, $2,000; and office equipment, $11,500. There were no liabilities received.
June 1 Paid three month’s rent on a lease contract, $6,000.
June 2 Paid the annual premiums on property and casualty insurance policies, $2,400.
June 4 Received cash from clients as an advance payment for services to be provided and recorded it as unearned fees, $2,700.
June 5 Purchased additional office equipment on account, $3,500.
June 6 Received cash from clients on account, $3,000.
June 10 Paid cash for a newspaper advertisement, $200.
June 12 Paid for part of the debt incurred on June 5, $750.
June 12 Recorded services provided on account for the period June 1-12, $5,100.
June 14 Paid part-time receptionist for two weeks’ salary, $1,100.
June 17 Recorded cash from clients for fees earned for the period June 1-16, $6,500.
June 18 Paid cash for supplies, $750.
June 20 Recorded services provided on account for the period June 13-20, $3,100.
June 24 Recorded cash from cash clients for fees earned for the period June 17-24, $5,150.
June 26 Received cash from clients on account, $6,900.
June 27 Paid part-time receptionist for two weeks’ salary, $1,100.
June 29 Paid telephone bill for June, $150.
June 29 Paid electricity bill for June, $400.
June 30 Recorded cash from cash clients for fees earned for the period June 25-30, $2,500.
June 30 Recorded services provided on account for the remainder of June, $1,100.
June 30 Sara withdrew $5,000 for personal use.

Instructions:
1. Journalize each transaction in a two-column journal, referring to the following chart of accounts in selecting the accounts to be debited and credited.
11 Cash 31 Sara Keith, Capital
12 Accounts Receivable 32 Sara Keith, Withdrawals
14 Supplies 41 Service Revenue
15 Prepaid Rent 51 Salary Expense
16 Prepaid Insurance 52 Rent Expense
18 Office Equipment 53 Supplies Expense
19 Accumulated Depreciation 54 Depreciation Expense
21 Accounts Payable 55 Insurance Expense
22 Salaries Payable 59 Miscellaneous Expense
23 Unearned Service Revenue
2. Open T-accounts and post the journal entries to the T-accounts.
3. Complete a worksheet at end of June using the following adjustment data:
a. Insurance expired during June is $200.
b. Supplies on hand on June 30 are $650.
c. Depreciation of office equipment for June is $250.
d. Accrued receptionist salary on June 30 is $220.
e. Rent expired during June is $2,000.
f. Unearned service revenue on June 30 is $1,875.
4. Prepare an income statement, a statement of owner’s equity and a balance sheet.
5. Journalize and post the adjusting entries.
6. Journalize and post the closing entries.
7. Compute final balances in each T-account.
8. Prepare the post-closing trial balance.


Click here for the solution: For the past several years, Sara Keith has operated a part-time consulting business from her home

16-41 (Choosing the Type of Opinion) Several independent audit situations are presented here

16-41 (Choosing the Type of Opinion) Several independent audit situations are presented here. Assume that everything other than what is described would have resulted in an unqualified opinion.

Required
Indicate the type of opinion you believe should be expressed in each situation, and explain your choice. If an explanatory paragraph is needed, indicate whether it should precede or follow the opinion paragraph.

a. The auditor was unable to obtain confirmations from two of the client's major customers that were included in the sample. These customers wrote on the confirmation letters that they were unable to confirm the balances because of their accounting systems. The auditor was able to become satisfied by other audit procedures.

b. The client treated a lease as an operating lease, but the auditor believes it should have been accounted for as a capital lease.The effects are material.

c. The client changed from FIFO to LIFO this year.The effect is material. Assume:
1. The change was properly accounted for, justified, and disclosed.
2. The change was properly accounted for and disclosed, but was not properly justified.

d. The client restricted the auditor from observing the physical inventory. Inventory is a material item.

e. The client is engaged in a product liability lawsuit that is properly accounted for and adequately described in the footnotes. The lawsuit does not threaten the going concern assumption, but an adverse decision by the court could create a material obligation for the client.

f. The status of the client as a going concern is extremely doubtful. The problems are properly described in the footnotes.

g. One of your client's subsidiaries was audited by another audit firm, whose opinion was qualified because of a GAAP violation.You do not believe that the GAAP violation is material to the consolidated financial statements on which you are expressing an opinion.

h. You are convinced that your client is violating another company's patent in the process of manufacturing its only product.The client will not disclose this, because it does not want to wave a red flag and bring this violation to the other company's attention.

i. The client, with reasonable justification, has changed its method of accounting for depreciation for all factory and office equipment.The effect of this change is not material to the current year financial statements, but is likely to have a material effect in future years. The client's management will not disclose this change because of the immaterial effect on the current-year statements.You have been unable to persuade management to make the disclosure.


Click here for the solution: 16-41 (Choosing the Type of Opinion) Several independent audit situations are presented here

Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts

Problem 9-30 Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts. Design a substantive audit procedure that provides reasonable assurance of detecting each misstatement.

1. A bonus earned by the president of the company has not been recorded.
2. Several accounts payable to vendors that the company has never purchased from before are omitted from the accounts payable listing.
3. When client employees counted the physical inventory, they included a number of items that were consigned to, but do not belong to, the company.
4. There is no disclosure in the financial statements that a large accounts payable is due to a related party.
5. Accrued payroll is understated.
6. One-third of the inventory of diamond jewelry is actually cubic zircona or white sapphires.
7. The client paid the same vendor invoice twice, although it is still shown as an account payable.
8. Client personnel informed the auditors that underground petroleum tanks contained an inventory of high-octane gasoline when they actually contained water.
9. The client failed to record warranty expenses incurred after year-end applicable to sales made before year-end.
10. Inventory in one corner of the warehouse is overlooked and not counted during the client’s physical inventory count.


Click here for the solution: Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts

(Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects

(Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table.
Item Rate of return Beta,b
Risk-free asset 9% 0.00
Market portfolio 14 1.00
Project A __ 1.50
Project B ___ 0.75
Project C ___ 2.00
Project D ___ 0.00
Project E ___ -0.50

a. Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
b. Use your findings in part a to draw the security, market line (required return relative to nondiversifiable risk).
c. Discuss the relative nondiversifiable risk of projects A through E
d. Assume that recent economic events have caused investors to become less risk- averse, causing the market return to decline by 2%, to 12%. Calculate the new required returns for assets A through E, and draw the new security market line on the same set of axes that you used in part b.
e. Compare your findings in part a and b with those in part d. What conclusion can you draw about the impact of a decline in investor risk aversion on the required returns of risky assets?


Click here for the solution: (Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects

Loreal-American Corporation purchased several marketable securities during 2011

E 12-5 Securities available-for-sale; adjusting entries

Loreal-American Corporation purchased several marketable securities during 2011. At December 31, 2011, the company had the investments in common stock listed below. None was held at the last reporting date, December 31, 2010, and all are considered securities available-for-sale.

Required:
1. Prepare appropriate adjusting entries at December 31, 2011.
2. What amounts would be reported in the income statement at December 31, 2011, as a result of these adjusting entries?


Click here for the solution: Loreal-American Corporation purchased several marketable securities during 2011

Doctors Maben, Orlando, and Clark have been in a group practice for several years

BTN 12-3 Doctors Maben, Orlando, and Clark have been in a group practice for several years. Maben and Orlando are family practice physicians, and Clark is a general surgeon. Clark receives many referrals for surgery from his family practice partners. Upon the partnership’s original formation, the three doctors agreed to a two-part formula to share income. Every month each doctor receives a salary allowance of $3,000. Additional income is divided according to a percent of patient charges the doctors generate for the month. In the current month, Maben generated 10% of the billings, Orlando 30%, and Clark 60%. The group’s income for this month is $50,000. Clark has expressed dissatisfaction with the income-sharing formula and asks that income be split entirely on patient charge percents.

Required
1. Compute the income allocation for the current month using the original agreement.
2. Compute the income allocation for the current month using Clark’s proposed agreement.
3. Identify the ethical components of this partnership decision for the doctors.

Click here for the solution: Doctors Maben, Orlando, and Clark have been in a group practice for several years

Several independent audit situations are presented here

16-41: Several independent audit situations are presented here. Assume that everything other than what is described would have resulted in an unqualified opinion on the company’s financial statements.

Required
Indicate the type of opinion you believe should be expressed in each situation and explain your choice. If an explanatory paragraph is needed, indicate whether it should precede or follow the opinion paragraph.
a. The auditor was unable to obtain confirmations from two of the client’s major customers that were included in the sample. These customers wrote on the confirmation letters that they were unable to confirm the balances because of their accounting systems. The auditor was able to achieve satisfaction through other audit procedures.
b. The client treated a lease as an operating lease, but the auditor believes it should have been accounted for as a capital lease. The effects are material.
c. The client changed from FIFO to LIFO this year. The effect is material. Address each of the following situations:
(i) The change was properly accounted for, justified, and disclosed.
(ii) The change was properly accounted for and disclosed but was not properly justified.
d. The client restricted the auditor from observing the physical inventory. Inventory is a material item.
e. The client is engaged in a product liability lawsuit that is properly accounted for and adequately described in the footnotes. The lawsuit does not threaten the going-concern assumption, but an adverse decision by the court could create a material obligation for the client.
f. The status of the client as a going concern is extremely doubtful. The problems are properly described in the footnotes.
g. One of your client’s subsidiaries was audited by another audit firm, whose opinion was qualified because of a GAAP violation. You do not believe that the GAAP violation is material to the consolidated financial statements on which you are expressing an opinion.
h. You are convinced that your client is violating another company’s patent in the process of manufacturing its only product. The client will not disclose this because it does not want to wave a red flag and bring this violation to the other company’s attention. A preliminary estimate is that the royalty payments required would be material to the financial statements.
i. The client, with reasonable justification, has changed its method of accounting for depreciation for all factory and office equipment. The effect of this change is not material to the current
year financial statements, but is likely to have a material effect in future years. The client’s management will not disclose this change because of the immaterial effect on the current-year
statements. You have been unable to persuade management to make the disclosure.

Click here for the solution: Several independent audit situations are presented here

Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company

P23-7 Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative statement of financial position and income statement for Chapman as of May 31, 2010, are shown on the next page. The company is preparing its statement of cash flows.

AND SO ON

The following is additional information concerning Chapman's transactions during the year ended May 31, 2010.
1. All sales during the year were made on account.
2. All merchandise was purchased on account, comprising the total accounts payable account.
3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.
4. The other expenses are related to prepaid items.
5. All income taxes incurred during the year were paid during the year.
6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.
7. There were no penalties assessed for the retirement of bonds.
8. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions
(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.
(b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2010, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)
(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2010.

Click here for the solution: Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company

Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries

Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries. While the majority of its revenues are recognized at point of sale, Nomar appropriately recognizes revenue long-term construction contracts using the percentage-complete method. It recognizes sales of some properties using the installment-sales approach. Income data for 2013 from operations other than construction and real estate are as follows:

Revenues 5,500,000
Expenses 4,200,000

1. Nomar started a construction project during 2012. The total contract price is 500,000, and 100,000 in costs were incurred in 2013. Estimated costs to complete the project in 2014 are 200,000. In 2012 Nomar incurred 100,000 of costs and recognized 25,000 gross profit on this project. Total billings at the end of 2013 were 230,00, and total cash collected as the end of 2013 was 202,500.
2. During this year, Nomar sold real estate parcels at a price of 480,000. Nomar recognizes gross profit at an 18% rate when cash is received. Nomar collected 220,000 during the year on these sales.

Solve
A) Determine net income for Nomar for 2013. Ignore income taxes.
B) Prepare the journal entries to record the costs incurred and gross profit recognized in 2013 on the construction project.
C) For 2013, show how the details related to this construction contract would be disclosed on the balance sheet.
D) Nomar is negotiating real estate sales with some new customers which are more uncertain as to the customers’ ability to make all payments. Is there a more appropriate revenue recognition policy for these customers? Explain.

Click here for the solution: Nomar Industries, Inc. operates in several lines of business, including the construction and real estate industries