Chatter Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Chatter’s Accounts Receivable account was $389,000 and the Allowance for Doubtful Accounts had a debit balance of $5,000. The year-end balance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the aging schedule shown below:

Days Account Outstanding Amount Probability of Collection
Less than 16 days $293,000 .97
Between 16 and 30 days $102,000 .89
Between 31 and 45 days $ 70,000 .83
Between 46 and 60 days $ 55,000 .76
Between 61 and 75 days $ 28,000 .60
Over 75 days $ 8,000 .30
  1. What is the appropriate balance for the Allowance for Doubtful Accounts at year-end?
  2. Show how accounts receivable would be presented on the balance sheet.
  3. What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
  1. Cost of Goods Sold

Redster Company is a manufacturing firm. Presented below is information concerning one of its products, Ander:

Date Transaction Quantity Price/Cost
1/1 Beginning inventory 2,900 $10
2/12 Purchase 3,300 $15
3/2 Sale 2,400 $28
4/18 Purchase 4,500 $18
5/31 Sale 3,800 $30

Compute the cost of goods sold under the following situations:

  1. Periodic system, FIFO cost flow
  2. Perpetual system, FIFO cost flow
  3. Periodic system, LIFO cost flow
  4. Perpetual system, LIFO cost flow
  5. Periodic system, weighted-average cost flow
  6. Perpetual system, moving-average cost flow

  1. Depreciation Expense
    Valley Corporation purchased a new piece of equipment on June 1, 2011. The cost of this machine was $325,000. The company estimated that the machine would have a salvage value of $25,000 at the end of its service life. Its life is estimated at four years and its working hours are estimated at 50,000 hours. Year end is December 31.
    Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.
  2. Straight-line depreciation for 2011.
  3. Units of production method for 2011, assuming that machine usage was 13,000 hours.
  4. Sum-of-the-years’-digits for 2012.
  5. Double-declining balance for 2012.
  1. Remaining Life

Taylor Lewis Company has provided information on intangible assets as follows.

A patent was purchased from Craig Company for $4,000,000 on June 1, 2010. Lewis estimated the remaining useful life of the patent to be eight years. The patent was carried in Craig’s accounting records at a net book value of $3,500,000 when Craig sold it to Lewis.

During 2011, a franchise was purchased from Faragher Company for $360,000. In addition, 8% of revenue from the franchise must be paid to Faragher. Revenue from the franchise for 2011 was $1,950,000. Lewis estimates the useful life of the franchise to be 12 years and takes a full year’s amortization in the year of purchase.

Lewis incurred research and development costs in 2010 as follows.

Materials and equipment $286,500
Personnel $153,700
Indirect costs $ 95,355

Lewis estimates that these costs will be recouped by December 31, 2014. The materials and equipment purchased have no alternative uses.

On January 1, 2011, because of recent events in the field, Lewis estimates that the remaining life of the patent purchased on June 1, 2010, is only five years from January 1, 2011.

  1. Prepare a schedule showing the intangible section of Lewis’s balance sheet at December 31, 2011. Show supporting computations in good form.
  2. Prepare a schedule showing the income statement effect for the year ended December 31, 2011, as a result of the facts above. Show supporting computations in good form.