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understanding financial accounting

Financial Accounting In An Economic Context 3rd Edition Jamie Pratt - Solutions

Portland Products purchased a machine on January 1, 1993, for $60,000 and estimated its use¬ ful life and salvage value at five years and $12,000, respectively. On January 1, 1996, the com¬ pany added three years to the original useful-life estimate. REQUIRED:a. Compute the book value of the
Apex Trucking purchased a truck for $100,000 on January 1, 1996. The useful life of the truck was estimated to be either five years or 200,000 miles. Salvage value was estimated at $20,000. (The activity method of Over the actual life of the truck it logged the following miles: depreciation) Year 1
Firton Brothers purchased a tract of land that included an abandoned warehouse for $90,000. The warehouse was razed and the site was prepared for a new building at a cost of $10,000. Scrap materials from the warehouse were sold for $7,000. A building was then constructed for $140,000, a driveway
Stork Freight Company owns and operates fifteen planes that deliver packages worldwide. The planes were purchased on January 1, 1993, for $1 million each. The company estimates that the planes will be scrapped after twelve years. Stork Freight uses straight-line depreciation. REQUIRED:a. Assume
Savory Enterprises reported the following information regarding the company’s fixed assets in the footnotes to the company’s 1996 financial statements. Office furniture $500,000 Less: Accumulated depreciation 300,000 200,000 Chapter 9 Long-Lived Assets 461 REQUIRED:a. Assume that Savory
Paris Company purchased equipment on January 1, 1994, for $25,000. The estimated useful life of the equipment is five years, the salvage value is $5,000, and the company uses the dou¬ ble-declining-balance method to depreciate fixed assets. REQUIRED:a. Provide the journal entry if the equipment is
Lewis Real Estate purchased a new photocopy machine on January 1, 1996, for $120,000. The company’s bookkeeper made the following entry to record the acquisition. Depreciation Expense (E, — SE) 120,000 Cash (—A) 120,000 The photocopy machine has an estimated useful life of four years and an
Natural Extraction Industries paid $4 million for the right to drill for oil on a tract ol land in western Texas. Engineers estimated that this oil deposit would produce 100,000 barrels ot crude oil. 462 Part 3 Assets: A Closer Look REQUIRED:a. During the first year of operations Natural Extraction
The financial information below was taken from the records of White Bones, Inc. 1997 1996 Balance Sheet t Equipment Less: Accumulated depreciation Net book value $37,500 17,600 $19,900 $32,700 14,300 $18,400 Income Statement Depreciation expense Gain on sale of equipment $ 7,200 2,100 $ 6,800 0
The financial information below was taken from the records of Frederickson and Peffer. 1997 1996 Balance Sheet Equipment $26,900 $23,400 Less: Accumulated depreciation 10,500 9,800 Net book value Income Statement $16,400 $13,600 Depreciation expense $3,800 $3,500 Loss on sale of equipment Statement
Swift Corporation incorporated on January 1, 1996, and incurred $45,000 in organization costs. REQUIRED: ^a. Should Swift Corporation capitalize or expense these costs? Defend your answer.b. If these costs are capitalized, over what period of time should they be amortized? Provide the amortization
The following information was taken from the internal financial records of Southern Robotics regarding a patent filed in 1996 for a new robotics arm used for manufacturing. 1. Legal and filing fees of $50,000 were paid during 1996 for filing the patent. 2. Legal fees of $200,000 were incurred and
Stonebrecker International recently purchased new manufacturing equipment. The equipment cost $1 million. The company also incurred additional costs related to the acquisition of the equipment. The total cost to transport the equipment to Stonebrecker’s plant was $80,000, half of which was paid
The JHP Company purchased a building, some office equipment, two cranes, and some land on January 1, 1996, for a total of $1 million cash. JHP has obtained the following appraisals of these assets. Asset FMV ON 1/1/96 Estimated Life Estimated Salvage Value Building $300,000 20 years $75,000 Office
Gidley, Inc., purchased a piece of equipment on January 1, 1996. The following information is available for this purchase. Purchase price $950,000 Salvage value $50,000 Transportation $100,000a Useful life 4 years Installation $130,000b "“Included in the transportation cost is $1,000 for
McCartney Manufacturing purchased a dryer for $100,000 on January 1, 1993. The estimated life of the dryer is five years, and the salvage value is estimated to be $10,000. McCartney uses (Accounting for the straight-line method of depreciation. betterments and maintenance costs) Chapter 9
Hulteen Hardware purchased a new building on January 1, 1992, for $1,500,000. The company expects the building to last 25 years and expects to be able to sell it then for $150,000. During 1997 the building was painted at a cost of $5,000. Almost ten years after acquiring the build¬ ing, the roof
Burke Copy Center purchased a machine on January 1, 1991, for $180,000 and estimated its useful life and salvage value at ten years and $30,000, respectively. On January 1, 1996, the company added three years to the original useful-life estimate. REQUIRED:a. Compute the book value of the machine as
Note: Knowledge of the time value of money is necessary for this problem (see Appendix 4A). Kimberly Sisters purchased equipment for $80,000 on January 1, 1996. Kimberly can use the double-declining-balance method for tax purposes but does not understand why it should be preferred over
Bently Poster Company pays income taxes on net income at the rate of 32 percent. The com¬ pany pays a bonus to its officers of 8 percent of net income after taxes and pays dividends to its stockholders in the amount of 75 percent of net income after taxes. On January 1, 1996, the company purchased
Westmiller Construction Company purchased a new truck on December 31, 1994, for $48,000. The truck has an estimated useful life of three years and an estimated salvage value of $12,000. When the truck was purchased, the company’s accountant mistakenly made the following entry: Depreciation
Jalen Enterprises reports the following information in its 1996 financial report: 12/31/96 12/31/95 Plant equipment $1,000,000 $750,000 Less: Accumulated depreciation 590,000 490,000 $ 410,000 $260,000 ADDITIONAL INFORMATION: 1. Jalen Enterprises began operations on January 1, 1994, and the entire
Webb Net Manufacturing purchased a new net weaving machine on January 1, 1994, for $500,000. The new machine has an estimated life of five years and an estimated salvage value of $100,000. It is company policy to use straight-line depreciation for all of its machines. REQUIRED:a. Assume that Webb
Garmen Oil Company recently discovered an oil field on one of its properties in Texas. In order to extract the oil, the company purchased drilling equipment on January 1, 1996, for $800,000 cash and also purchased a mobile home on the same date for $54,000 cash, to serve as on-site headquarters.
On January 1, 1996, Diversified Industries purchased Specialists, Inc., for $1,800,000. The bal¬ ance sheet of Specialists, Inc., at the time of purchase follows. Assets Current assets $650,000 Long-lived assets 330,000 Total assets $980,000 Liabilities and Stockholders’ Equity Liabilities
The Wall Street Journal (December 12, 1995) reported that the FASB now requires that com¬ panies must estimate the future expected value of individual assets and take a write-down in each case if the future value is less than the book value. While this requirement is expected to reduce the
In the past, private colleges, which are subject to the accounting and reporting standards for nonprofit entities, have not been required to recognize depreciation on their financial state¬ ments. However, The Wall Street Journal reported that “many of the nations 1,500 private col¬ leges are
Ford Motor Company said it would spend $200 million to refurbish its Mustang assembly plant in Dearborn, Michigan. The aging factory had been discussed as a candidate for closing, but Ford’s current capacity of Mustang production is barely able to keep pace with demand. REQUIRED:a. What issues
J. Kendrick Noble, analyst at Paine Webber, was quoted in USA Today (June 19, 1990) as say¬ ing in reference to a spending boom in the newspaper industry: “We're seeing more spent on plant and equipment today than at any time since just after World War II.” Indeed, during 1990 newspapers like
An article published in The New York Times (May 1, 1990) entitled “Pricing the Priceless: Museums Resist, Accountants Insist” states that “many museums’ most valuable assets, from moon rocks to Michelangelos, are nowhere on their books.” In response, the FASB “is drafting tough new
After being asked how General Electric has maintained such consistent earnings growth over the past decade, Dennis Dammerman, the company’s chief financial officer says, “We’re the best company in the world.” However, The Wall Street Journal (November 3, 1994) offers another explanation. It
As discussed in this chapter, U.S. accounting standards at one time contained a requirement that certain large companies disclose current values for inventories and fixed assets. Such dis¬ closure included dollar amounts for cost of goods sold and depreciation that were based on cur¬ rent instead
Refer to the annual report of MCI in Appendix C and answer the following questions.a. What is the major fixed asset category for MCI? What percent of MCI’s total assets come from this category?b. MCI’s annual report mentions SOP (Statement of Position) 93-7 “Reporting on Advertising Costs.”
Forbes (July 11, 1988) reports that King World Productions Inc., the $285-million-per-year television syndicator of Jeopardy, Wheel of Fortune, and Oprah Winfrey, reported on its 1987 balance sheet a shareholders’ equity amount of a negative $30 million. The article reports fur¬ ther that
Under current accounting rules, companies can deduct in a single year the goodwill they obtained through acquisitions—provided they can prove that future earnings won’t cover the annual deduction for goodwill amortization. Recently, several companies have chosen to exer¬ cise this option after
What is inventory? Why are managers, investors, creditors, and auditors interested in the methods used to account for it?
How is the Inventory account on the balance sheet linked to the income statement? How does the allocation of the capitalized inventory cost affect the financial statements?
Name the four major issues that must be addressed when accounting for inventory.Briefly describe each issue and explain how it is related to the others.
What is the general rule for deciding what items to include in inventory? What is a con¬signment, and how does it relate to inventory accounting? How might consignments be difficult for auditors?
Assume that Rawlers Corporation acts as a consignee for Matton Manufacturing. If Matton’s inventory is mistakenly included on the balance sheet of Rawlers, how will the financial statements of Rawlers be misstated?
What factors must be considered when attempting to determine who owns goods that are in transit at the end of an accounting period? What is the meaning of FOB shipping point and FOB destination? How might these shipping terms be helpful in determining whether a sale or purchase has been completed
What is the general rule for deciding what costs to attach to inventory items? Discuss the basic differences between a retailer and a manufacturer and how these differences affect inventory accounting.
What is the basic difference between the perpetual and the periodic inventory methods?Which method is easier to implement? Why?
The advent of computer systems has caused a number of companies to switch from the periodic method of carrying inventory to the perpetual method. Why would companies do this? What advantages does the perpetual method have over the periodic method?Provide an example.
The specific identification method is a procedure for determining which inventory costs are allocated to Cost of Goods Sold and which inventory costs are allocated to ending inventory. What are the advantages and disadvantages of this procedure? How can this procedure be used by a manager to
What is the basic difference between FIFO and LIFO cost flow assumptions? If inven¬tory costs are stable across time, is there any difference between the cost ol goods sold and ending inventory produced under FIFO and LIFO? Why or why not?
From a measurement standpoint, which assumption (FIFO or LIFO) is preferred?State your answer in terms of the matching principle and the balance sheet valuation of inventory.
State the LIFO conformity rule. How might this rule affect a manager’s decision to choose an inventory flow assumption?
List the economic advantages and disadvantages of LIFO and FIFO, and explain why companies choose one or the other.
Is it advisable simply to choose FIFO because in times of rising inventory costs it pro¬vides higher inventory and net income numbers? Might a higher income number increase the value of a company’s capital stock? Discuss.
What is a LIFO liquidation, and how might one inflate net income?
In periods of rising inventory costs, why would a manager who uses LIFO want to avoid a year in which sales significantly exceed purchases? How might it be done? What prob¬lems may be associated with this strategy?
Define the LIFO reserve and explain how it can be used to provide useful information.
Describe the lower-of-cost-or-market rule as applied to inventories. Why is it viewed as inconsistent by a number of its critics? From a measurement standpoint, do these argu¬ments have merit? If so, how would the lower-of-cost-or-market rule have to be justified?
What is inventory turnover? What problems could be indicated by low inventory turnover? What problems could be indicated by high inventory turnover?
Explain how company groups in Japan can lead to lower inventory levels and inventory carrying costs. What are the implications for the use of LIFO and FIFO in Japan?
(Appendix 7A) Why is applying the lower-of-cost-or-market rule to inventories often dif¬ficult? Are inventory market values objectively determined? What three market values are considered in the rule? Which market value is preferred if it does not exceed the “ceil¬ing” or dip below the
Nick’s Fish Market purchased Maine lobster on account on October 10, 1997, for a gross price of $76,000. Nick also purchased Alaskan king crab on account on October 11, 1997, for a gross price of $36,000. The terms of both sales were 2/15, n/30. Nick paid for the first purchase on October 20,
E7-2(Accounting for inventory purposes)Baymont Corporation purchased inventory on account on March 3, 1997, for a gross price of$50,000. The company purchased additional inventory on account on March 10, 1997, for a gross price of $140,000. The terms of both sales were 3/12, n/30. Baymont
(Compute the missing 12/31/97 12/31/96 12/31/95 1 2/31 /94 values) Beginning inventory $110,000 9• $125,000 $ 90,000 Purchases 9• $ 75,000 60,000 50,000 Purchase discounts (10,000) 9• (5,000) 9•Cost of goods available for sale 155,000 190,000 9 e 135,000 Ending inventory 75,000 9• 130,000
E7-4(The financial statement effects ofinventory errors)# Pacers Corporation reported the following items in its 1997 financial report.1997 1996$19^,000 240,000 Sales Cost of goods sold:Beginning inventory Purchases Goods available for sale- ~$430,000 Less: Ending inventory 2^000 Cost of goods sold
E7-5(Goods in transit as of the end ofthe accounting period)Dallas Manufacturing engaged in five transactions involving inventory at the end of 1997:1* Ordered $50,000 of inventory on December 29, 1997. The goods were shipped on December 30, 1997, with the terms FOB shipping point. Dallas received
E7-6(Carrying inventories:perpetual and periodic methods)E7-7(Income manipulation under specific identification)
Vinnie’s House of Televisions has 75 identical 27-inch color monitors in stock on January 1,€ 1997. Vinnie maintains records of the serial numbers of each monitor to track their costs.Vinnie purchased the 75 monitors on December 5, 1996, for $450 each. He also purchased 50 on January 2, 1997,
E7-9(Inventory flow assumptions over several periods and income taxes)V 9 Heller Bottling Company began business in 1993. Inventory units purchased and sold for the* first year of operations and each of the following four years follow.Units Purchased Cost per Unit Units Sold 1993 10,000 $12 5,000 >,
E7-1 O(Using the LIFO reserve)The following disclosure was included in the footnotes of Microline Company, which uses the LIFO cost flow assumption and reported net income of $38,200 for 1997. The company’s effective tax rate is 35%.1997 1996 Inventories at current cost $23,500 $24,300 Less:
E7—1 1(The lower-of-cost-ormarket rule and hidden reserves)Central Incorporated has two items in inventory as of December 31, 1997. Each item was pur2 chased for $40. Company management chose to write down Item #1 to $28, which at year end was assessed to be its market value. Management did not
E7—1 2 The following information concerns the ending inventory of five different companies.(Appendix 7A: Applying the lower-of-cost-ormarket rule)Company Historical Cost Net Realizable Value Replacement Cost Net Realizable Value Less a Normal Profit Margin Wheaton $32,300 $40,000 $37,300 $
E7-8(Inventory assumptions and manipulating income under specific identification)The following information comes from the records of Telly’s Supply.Beginning inventory $32,000 Inventory purchases 85,000 Transportation-in 4,300 An inventory count taken at year end indicates that inventory with a
On November 15 and 26, Brown and Swazey purchased merchandise on account for gross prices of $8,000 and $12,000, respectively. Terms of both purchases were 2/10, n/30. The com¬ pany uses the perpetual inventory method, none of these items have been sold, and both accounts are paid in full on
Stober Corporation made two purchases of inventory on account during the month of March. The first purchase was made on March 5 for $30,000, and the second purchase was made on (The gross method and March 10 for $60,000. The terms of each purchase were 2/10, n/30. The first purchase was
The information below was taken from the records of Rice Brothers. 1997 1996 1995 Sales $100,000 $90,000 $85,000 Cost of goods sold 50,000 42,000 40,000 Gross profit $ 50,000 $48,000 $45,000 Expenses 37,000 32,000 20,000 Net income $ 13,000 $16,000 $25,000 You are auditing the Rice Brothers’
The income statement and balance sheet as of December 31, 1996, for Thomas and Sons are provided below. The company uses the FIFO cost flow assumption. Income Statement Sales $200,000 Cost of goods sold Gross profit Selling and admin, expenses Net income Balance Sheet 130,000 $ 70,000 40,000 $
Yakima Sporting Goods reported the following information as of December 31, 1996: (Including goods in transit and consignments in ending inventory) Inventory (based on a physical count on 12/31/96) $2,345,000 Accounts payable 778,000 ADDITIONAL INFORMATION: 1. Yakima Sporting Goods had ordered
The purchase schedule for Lumbermans and Associates is provided below. (The financial statement Date Items Cost and income tax effects Purchased per 1 of averaging, FIFO, March 15 6,000 $1.30 and LIFO) July 30 9,000 1.50 December 17 7,000 1.60 Total 22,000 The inventory balance as of the beginning
IBT has used the LIFO inventory cost flow assumption for five years. As of December 31, f 1995, IBT had 700 items in its inventory, and the $9,000 inventory dollar amount reported on the balance sheet consisted of the following costs. When Purchased Number of Items Cost per Item Total 1992 500 $12
Financial statements as of December 31, 1996, for Beverly Company are provided below. Beverly used the FIFO inventory cost flow assumption to prepare the following financial state¬ ments. Income Statement Sales Cost of goods sold: Beginning inventory $20,000 Purchases 40,000 Goods available for
Ruhe Auto Supplies began operations in 1983. The following represents the company’s inven tory purchases and sales in the first and subsequent years of operations. (LIFO liquidations, income tax implications, Year Units Cost per Units Year Units Cost per Units and year-end Purchased Unit Sold
The Magic Teddy Bear Toy Company entered into the following transactions during January 1996. 1. January 3: 2. January 3: 3. January 9: 4. January 10: 5. January 15: 6. January 19: 7. January 23: 8. January 27: 9. January 28: 10. January 28: 11. January 29: 12. January 30: 13. January 31: 14.
You are a financial analyst presently reviewing the financial statements of Danner International and Brady Enterprises, two companies of similar size within the same industry. Net income of $39,300 and $42,700 was reported for 1997 by Danner and Brady, respectively. After a thor¬ ough comparison
J. Hartney, controller of Babbit Plumbing, has compiled the following information to aid him in applying the lower-of-cost-or-market rule to the company’s inventory. Replacement Cost Net Realizable Value Net Realizable Value Less a Normal Profit Historical Cost Item A $52 $55 $ 7 $60 Item B 61 57
In its December 31, 1994, annual report, Amoco Corporation reported the following inventories: MILLIONS OF DOLLARS 1994 1993 Crude oil and petroleum products $ 349 $ 415 Chemical products 375 377 Other products and merchandise 24 21 Materials and supplies 294 $1,042 297 $1,110 During the year ended
In the early 1980s an oil glut caused Texaco, a LIFO user, to delay drilling, which cut its oil inventory levels by 16%. The LIFO cushion (i.e., the difference between LIFO and FIFO inventory values) that was built into those barrels over the year amounted to $454 million and transformed what would
A partner from a major accounting firm made the following comment when asked about the accounting methods used by companies in the software industry: “Accounting policies that have adverse short-term effects on financial statements cannot help the industry raise capital.” After reading such a
The following quote was taken from The Wall Street Journal (December 14, 1992): How an audit can misfire is illustrated by the way Deloitte & Touche, the auditors ofLaribee Manufacturing Co., failed to realize that the New York copper wire maker was buoying a sink¬ ing ship by creating fictitious
The Wall StreetJournal (January 31, 1991) recently reported that many U.S. manufacturers are following the Japanese and moving toward just-in-time manufacturing methods to cut inven¬ tory carrying costs and speed production. The same article also notes, however, that these com¬ panies were hurt
Review the MCI annual report and answer the following questions.a. In what industry would you classify MCI—manufacturer, retail, financial services, or other services? Why?b. How important is inventory management to MCI? Identify some of the major asset man¬ agement issues faced by the company
On a separate piece of paper, complete the following chart to show the effect of each transac¬ tion on the accounting equation. Transaction Assets = Liabilities + Stockholders’ Equity 1. Owners contributed $30,000 cash. 2. Purchased land for $20,000 cash. 3. Borrowed $9,000 cash from bank. 4.
E5-2 (Effects oftransactions on accounts) Consider the same transactions as in E5-1, but this time complete the following chart, using a separate sheet of paper. Assets = Liabilities + Stockholders’ Equity Accounts Contributed Retained Trans. Cash Receivable Land = Notes Payable 4 Capital
Total each asset, liability, and stockholders’ equity account in E5-2, and prepare an income statement, a statement of retained earnings, a balance sheet, and a statement of cash flows. Assume that the current year is the company’s first year of operations. (Preparing the financial statements)
Assume that Cathedral Enterprises, which is in its first year of operations, entered into the fol¬ lowing transactions. Show how the five transactions affect the accounting equation, and pre¬ pare an income statement, statement of retained earnings, a balance sheet, and a statement of cash flows.
The Brown Corporation experienced the following financial events on October 10, 1997. 1. The company entered into a new contract with the employees’ union that calls for a $2.00 hour increase in wages, a longer lunch break, and cost-of-living adjustments, effective January 1, 1998. 2. The company
The following accounts and balances were taken from the ledger of Pratt Printing Company. Equipment $35,000 Accounts Payable $ 15,000 Fees Earned 40,000 Common Stock 23,000 Retained Earnings 10,000 Advertising Expense 13,000 Notes Payable 25,000 Other Revenues 8,000 Interest Expense 3,000
The following Cash T-account summarizes all the transactions affecting cash during 1997 for Miller Manufacturing. Cash Beginning balance 9,000 Equipment purchases 24,000 Sales of services 45,000 Rent payable payments 7,000 Receivables collections 50,000 Bank loan principal 12,000 Sale of land 7,500
Small and Associates, a small manufacturing firm, entered into the following cash transactions during January of 1997. 1. Issued 600 shares of stock for $25 each. 2. Sold services for $4,000. 3. Paid wages of $1,600. 4. Purchased land as a long-term investment for $9,000 cash. 5. Paid a $2,000
The following transactions were entered into by Ed’s Lawn Service during 1997, its first year of operations. 1. Collected $12,000 in cash from stockholders. 2. Borrowed $5,000 from a bank. 3. Purchased two parcels of land for a total of $10,000. 4. Paid $5,000 to rent lawn equipment for the
The following cash T-account summarizes all the transactions affecting cash during 1997 for Miller Manufacturing. Cash Beginning balance 8,000 Sales of inventories 34,000 Receivable collections 40,000 Sales of long-term investments 12,500 Issuance of common stock 14,000 Long-term borrowings 9,000
Eaton Enterprises made the following adjusting journal entries on December 31, 1996. 1. 2. 3. Rent Expense Rent Payable Insurance Expense Prepaid Insurance Depreciation Expense Accum. Depr. 1,200 4. Interest Receivable 1,500 1,200 Interest Revenue 1,500 5,000 5. Unearned Revenue 200 5,000 Fees
Hog Heaven Rib Joint made the following journal entries on December 31, 1996. 1. Wage Expense 6,000 7. Equipment 9,000 Wages Payable 6,000 Cash 9,000 2. Interest Expense 1,000 8. Supplies Expense 12,000 Cash 1,000 Supplies Inventory 12,000 3. Cash 10,500 9. Accounts Payable 8,000 Note Payable
The Hurst Corporation pays its employees every Friday for the 5-day week just ended. On January 2, 1998 the company paid its employees $70,000 for the week beginning Monday, December 29. REQUIRED:a. Assuming that the employees earned wages evenly throughout the week, prepare any adjusting journal

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