Problem
1. Define the following principles, concepts and terminology. Give an example of each:
Matching
Cost
Conservatism
Entity
Going Concern
Depreciation
Breakeven
Variable cost
2. Under the balance sheet classification of property, plant, and equipment, some accounts need ad at the end of each month and others do not. Which do and why? Which do NOT and why?
3. Classify the following items as:
a. accrued revenue (accrued asset)
b. deferred revenue (unearned revenue)
c. accrued expense (accrued liability)
d. deferred expense (prepaid expense)
(1) Three months’ rent paid in advance
(2) Rental income for six months received in advance
(3) Jobs completed but not yet billed at month-end
(4) Interest payable accrued on a note, but not yet paid
(5) Telephone bill owed but not yet paid
(6) A three-year premium paid on auto fleet insurance policy
4. Details of invoices for purchases of merchandise are as follows:
Merchandise Transportation Terms Returns and Allowances
a. $1,000 $25 FOB shipping point, 1/10, n/30 $200
b. 5,000 FOB destination, n/30 400
c. 4,000 50 FOB shipping point, 2/10, n/30 150
d. 5,000 FOB destination, 1/10, n/30
Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount.
5. Determine the amount to be added to Allowance for Doubtful Accounts in each of the following cases:
(a) Balance of $500 in the allowance account just prior to adjustment. Analysis of accounts receivable indicates doubtful accounts of $9,500.
(b) Balance of $950 in the allowance account just prior to adjustment. Uncollectible are estimated at 3.5% of sales, which totaled $1,000,000 for the year.
6. The following units are available for sale during the year:
January 1 Beginning Inventory 10 Units @ 18
April 3 Purchases 30 Unis @ 20
August 31 Purchases 28 Units @ 25
September 29 Purchases 17 Units @ 30
December 31 Ending Inventory 21 Units
Determine ending inventory cost by (a) FIFO, (b) LIFO, and (c) average cost.
7.On the basis of the following data related to current assets for Mission Co. at December 2010, prepare a partial balance sheet in good form.
Cash and cash equivalents $100,000
Notes receivable 50,000
Accounts receivable 290,000
Allowance for doubtful accounts 20,000
Interest receivable 750
Merchandise inventory-at lower of cost (first-in, first-out method) or market 120,000
8. Indicate the section of the balance sheet (current assets, fixed assets, investments, current liabilities, long- term liabilities, and stockholders’ equity) in which each of the following is reported:
(a) Note receivable due in 3 years
(b) Note receivable due in 90 days
(c) Allowance for doubtful accounts
9. You have been hired by a high-growth startup company to assist in the determination of what depreciation method to employ for financial reporting. The company’s fixed assets are equally divided among buildings and high-tech equipment (heavily used in the initial years).
(a) Can the company select different methods of depreciation for financial reporting? Explain.
(b) Explain to company management which method of depreciation would be suitable for each type of fixed assets the company employs. Also, state why.
(c) Which method of depreciation would the company choose for taxes? Explain why.
10. A machine with a useful life of 6 years and a residual value of $3,000 was purchased at the beginning of year 1 for $30,000. The machine was sold for $15,000 on April 1 in year 4.
(a) What was the book value of the equipment at the end of year 3 assuming the straight-line method of depreciation is used?
(b) Illustrate the effects on the accounts and financial statements of the depreciation from January 1 to April 1 of year 4.
(c) Illustrate the effects on the accounts and financial statements of the sale of the machine on April 1.
11. A company acquired mineral rights for $7,500,000. The mineral deposit is estimated at 600,000 tons and during the year 100,000 tons were extracted and sold.
(a) Calculate depletion expense for the year.
(b) Show the effects on the accounts and financial statements of the company.
(c) What is the book value of the mineral rights at the end of the current year?
12. During 2009, Lexie, Inc. acquired Lena, Inc. for $10,000,000. The fair market value of the net assets of Lena, Inc. was $8,500,000 on the date of purchase. During 2012, Lexie, Inc. determined the goodwill resulting from the Lena acquisition was impaired and had a value of $1,000,000.
(a) Determine the amount of goodwill implied during 2009.
(b) Illustrate the effects on the accounts and the financial statements of the amortization for 2012.
13. For each of the following items indicate whether the transactions listed below increased (+), decreased (-)or had no effect (o)by inserting the appropriate symbol.
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Net Income |
Assets |
Liabilities |
Owner’s Equity |
Cash Flow |
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(a) |
Sold Equipment for cash at a gain |
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(b) |
Recorded amortization expense on patents |
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Paid Cash for minor repairs to an asset |
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(d) |
Recorded a revenue expenditure incurred on account |
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Paid Cash to remove old building from land being prepared for use |
14. Indicate whether the following actions would (+) increase, (-) decrease, or (0) not affect a company’s total assets, liabilities, and stockholders’ equity.
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Assets |
Liabilities |
Stockholder’s Equity |
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(1) |
Declaring a cash dividend |
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(2) |
Paying the cash dividend declared in (1) |
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(3) |
Declaring a stock dividend |
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(4) |
Issuing stock certificates for the stock dividends declared in (3) |
15. Tops Company sells Products D and E and has made the following estimates for the coming year:
Product Unit Selling Price Unit Variable Cost Sales Mix
D $30 $24 60%
E 70 56 40
Fixed costs are estimated at $202,400. Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an operating income of $119,600 for the coming year.
(a) If Henry Company’s budgeted sales are $800,000, fixed costs are $350,000, and variable costs are $600,000, what is the budgeted contribution margin ratio?
(b) If the contribution margin ratio is 30% for Gray Company, sales are $900,000, and fixed costs are $180,000, what is the operating profit?
16. A corporation, which had 20,000 shares of common stock outstanding, declared a 3-for-l stock split.
(a) What will be the number of shares outstanding after the split?
(b) If the common stock had a market price of $240 per share before the stock split, would be an approximate market price per share after the split?
17. Smith Co. is considering the following alternative plans for financing the company:
Plan I Plan II
Issue 10% Bonds (at face) $1,000,000
Issue $10 Common Stock $3,000,000 $2,000,000
Income tax is estimated at 40% of income.
Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.