Exercise 1 - Cash discounts and purchase returns
On April 6, 2014, Fashion Furnishings purchased $24,800 of merchandise from James's Imports, terms 2/10, n/45. On April 8, Fashion returned $2,400 of the merchandise to James's Imports for credit. Fashion paid cash for the merchandise on April 15, 2014.
Instructions
a. What is the amount that Fashion must pay James's Imports on April 15?
b. How much must Fashion pay for the merchandise purchased if the payment is not made until April 20, 2014?
Exercise 2 - Treatment of NSF check
Montgomery Stationery's bank statement contained a $260 NSF check that one of its customers had written to pay for supplies purchased.
Instructions
a. Show the effects of recognizing the NSF check on the financial statements by recording the appropriate amounts in a horizontal statements model like the following one:
b. Is the recognition of the NSF check on Montgomery's books an asset source, use, or exchange transaction?
c. Suppose the customer redeems the check by giving Montgomery $290 cash in exchange for the bad check. The additional $30 was a service fee charged by Montgomery. Show the effects on the financial statements in the horizontal statements model in Instruction a.
d. Is the receipt of cash referenced in Instruction c an asset source, use, or exchange transaction?
Exercise 3 - Determining the true cash balance, starting with the unadjusted book balance
Henderson Company had an unadjusted cash balance of $7,215 as of May 31. The company's bank statement, also dated May 31, included a $68 NSF check written by one of Henderson's customers. There were $750 in outstanding checks and $930 in deposits in transit as of May 31. According to the bank statement, service charges were $50, and the bank collected a $500 note receivable for Henderson. The bank statement also showed $13 of interest revenue earned by Henderson.
Instructions - Determine the true cash balance as of May 31. (Hint: It is not necessary to use all of the preceding items to determine the true balance.)
Exercise 4 - Accounting for uncollectible accounts: Percent of revenue allowance method
Bing Auto Parts sells new and used auto parts. Although a majority of its sales are cash sales, it makes a significant amount of credit sales. During 2014, its first year of operations, Bing Auto Parts experienced the following:
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Sales on account
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$320,000
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Cash sales
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680,000
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Collections of accounts receivable
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295,000
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Uncollectible accounts charged off during the year
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1,400
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Instructions - Assume that Bing Auto Parts uses the allowance method of accounting for uncollectible accounts and estimates that 1 percent of its sales on account will not be collected. Answer the following questions:
a. What is the Accounts Receivable balance at December 31, 2014?
b. What is the ending balance of Allowance for Doubtful Accounts at December 31, 2014, after all entries and adjusting entries are posted?
c. What is the amount of uncollectible accounts expense for 2014?
d. What is the net realizable value of accounts receivable at December 31, 2014?
Exercise 5 - Effect of inventory cost flow (FIFO, LIFO, and weighted average) on gross margin
The following information pertains to Baxter Company for 2014.
Ending inventory consisted of 40 units. Baxter sold 310 units at $30 each. All purchases and sales were made with cash.
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Beginning inventory
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90 units @ $15
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Units purchased
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320 units @ $19
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Instructions -
a. Compute the gross margin for Baxter Company using the following cost flow assumptions:
(1) FIFO
(2) LIFO
(3) Weighted average.
Exercise 6 - Computing and recording straight-line versus double-declining-balance depreciation
At the beginning of 2014, Metal Manufacturing purchased a new computerized drill press for $75,000. It is expected to have a five-year life and a $15,000 salvage value.
Instructions
a. Compute the depreciation for each of the five years, assuming that the company uses
(1) Straight-line depreciation.
(2) Double-declining-balance depreciation