Intermediate Accounting Questions
1) (Estimating inventory)
The following data was available, when you are able to take on the preparation of the financial statements for Grand&Toy Inc. at January 31, 2005:
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AT COST
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AT RETAIL
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Inventory, February 1, 2004
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$72,800
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$98,500
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Markdowns
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35,000
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Markups
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73,000
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Markdown cancellations
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20,000
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Markup cancellations
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10,000
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Purchases
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219,500
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294,000
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Sales
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345,000
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Purchases returns and allowances
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4,300
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5,500
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Sales returns and allowances
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10,000
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REQUIRED:
i) Using the retail method (this method estimates lower-of-average-cost-and-market), compute the ending inventory at cost as of January 31, 2005. Make sure your answer is in good form with clearly labelled amounts.
ii) What are the three advantages of the retail method of inventory valuation. Please explain thoroughly.
2) (Research and Development Expenditures)
Apple Corporation deals with research and development (R&D) programs when the projects seem to be promising. In 2006, $145,000 was incurred for research costs and $250,000 for development costs for a biotechnology research project. Alas, by end of 2006, management was unable to determine if the project had any benefits.
REQUIRED:
i) Which accounts do you think should be charged for the R&D costs that were incurred in 2006? How would you show this in the financial statements?
ii) In 2007, the project was finished and the company was able to get a patent. Research costs was $75,000 and development costs was $150,000. Legal and administrative costs for obtaining the patent in 2007 was $35,000. Useful life for patent was 7 years. Prepare these costs in journal entry format and record the patent amortization in a journal entry format as well (for the full year) for 2007.
iii) Apple Corporation in 2008 was able to stand up for its patent in a lawsuit, and they won. Legal costs was $20,000. Patent's life was extended till 2017. Write down the journal entries for the patent amortization (full year) and legal costs for the 2008 year.
iv) In 2008, in order to further advance a product design, additional consulting and engineering costs were incurred of $85,000. By having these additional costs, this improved on the product's design and manufacturing. Explain the accounting and classification treatment for the additional costs mentioned.
3) (Temporary Investments)
Audi Corporation had the following temporary investments on December 31, 2004, and they were acquired in 2004.
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Number of shares
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Original Unit Cost
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December 31, 2004
Market Value
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D Corp
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15,000
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$2.00
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$25,000
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E Inc.
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10,000
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6.50
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80,000
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F Ltd.
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30,000
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3.00
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55,000
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Audi Corporation had the following transactions in 2005:
April 1: For $8.50/share purchased 10,000 Z Inc. shares.
May 5: For $17,000 sold all of D Corp. shares.
August 15: For $9/share sold 4,000 E Inc. shares.
The acquisitions and sales were net of all commissions.
For the different marketable securities at December 31, 2005, the market values were:
E Inc. $8.50/share
F Ltd. $1.35/share
Z Inc. $7.75/share
It has been ascertained by management that the investments should be classified as available for sale.
REQUIRED:
i) At December 31, 2004 write down the journal entries, and demonstrate how the gains or losses that result will be reported in the financial statements.
ii) Write down the essential journal entries in order to record the transactions that occurred throughout the year.
iii) At December 31, 2005, write down the essential journal entries, and demonstrate how the gains or losses that result will be reported in the financial statements.