Part -1:
1) BAD DEBT
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?
2) 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
3) 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.
4. Straight-line depreciation for 2011.
5. Units of production method for 2011, assuming that machine usage was 13,000 hours.
6. Sum-of-the-years'-digits for 2012.
7. Double-declining balance for 2012.
4) 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
|
|
|
$535,555
|
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.
a. Prepare a schedule showing the intangible section of Lewis's balance sheet at December 31, 2011. Show supporting computations in good form.
b. 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.
Part -2:
1) PENSION CALCULATION
Melanie Vail Corp. sponsors a defined benefit pension plan for its employees. On January 1, 2012, the following balances relate to this plan.
|
Plan assets
|
$480,000
|
|
Projected benefit obligation
|
625,000
|
|
Accumulated OCI (PSC)
|
100,000 Dr.
|
As a result of the operation of the plan during 2012, the following additional data are provided by the actuary.
|
Service cost for 2012
|
$90,000
|
|
Settlement rate
|
9%
|
|
Actual return on plan assets in 2012
|
57,000
|
|
Amortization of prior service cost
|
19,000
|
|
Expected return on plan assets
|
52,000
|
|
Unexpected loss from change in projected benefit obligation, due to change in actuarial predictions
|
76,000
|
|
Contributions in 2012
|
99,000
|
|
Benefits paid retirees in 2012
|
85,000
|
1. prepare a pension worksheet. On the pension worksheet, compute pension expense, pension asset/liability, projected benefit obligation, plan assets, prior service cost, and net gain or loss.
2. Compute the same items as in (1), assuming that the settlement rate is now 7% and the expected rate of return is 10%.
3. Prepare the journal entry using the spreadsheet Journal Entries to record pension expense in 2012.
4. Indicate the reporting of the 2012 pension amounts in the income statement and balance sheet using the spreadsheet Pensions.
2) Lease Calculations
Assume that the following facts pertain to a noncancelable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a lessee.
|
Inception date
|
January 1, 2012
|
|
Annual lease payment due at the beginning of each year, beginning with January 1, 2012
|
$81,365
|
|
Residual value of equipment at end of lease term, guaranteed by the lessee
|
$50,000
|
|
Lease term
|
6 years
|
|
Economic life of leased equipment
|
6 years
|
|
Fair value of asset at January 1, 2012
|
$400,000
|
|
Lessor's implicit rate
|
12%
|
|
Lessee's incremental borrowing rate
|
12%
|
The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment.
1. Using the spreadsheet Lease Amort Schedule, prepare an amortization schedule that would be suitable for the lessee for the lease term.
2. prepare the journal entries for the lessee for 2012 and 2013 to record the lease agreement and all expenses related to the lease. Assume the lessee's annual accounting period ends on December 31 and that reversing entries are used when appropriate
3) Average Cost Method Calculations.
Garner Company began operations on January 1, 2010, and uses the average cost method of pricing inventory. Management is contemplating a change in inventory methods for 2013. The following information is available for the years 2010-2012.
|
Net Income Computed Using
|
|
|
Average Cost Method
|
FIFO Method
|
LIFO Method
|
|
2010
|
$15,000
|
$20,000
|
$12,000
|
|
2011
|
18,000
|
24,000
|
14,000
|
|
2012
|
20,000
|
27,000
|
17,000
|
On January 1, 2012, Garner issued 10-year, $200,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 30 shares of Garner common stock. The company has had 10,000 common shares outstanding throughout its life. None of the bonds have been exercised as of the end of 2013. (Ignore tax effects.)
1. Using the spreadsheet Journal Entries, prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2013.
2. Assume Garner Company used the LIFO method instead of the average cost method during the years 2010-2012. In 2013, Garner changed to the FIFO method. Using the spreadsheet Journal Entries, prepare the journal entry necessary to record the change in accounting principle.
3. Assuming Garner had the accounting change described in (2), Garner's income in 2013 was $30,000. Compute basic and diluted earnings per share for Garner Company for 2013. Show how income and EPS will be reported for 2013 and 2012.
4) Statement of Cash Flows
Ellwood House, Inc. had the following condensed balance sheet at the end of 2012.
|
ELLWOOD HOUSE, INC.
Balance Sheet
December 31, 2012
|
|
Cash
|
$ 10,000
|
Current liabilities
|
$ 14,500
|
|
Current assets (non-cash)
|
34,000
|
Long-term notes payable
|
30,000
|
|
Investments
|
40,000
|
Bonds payable
|
32,000
|
|
Plant assets
|
57,500
|
Common stock
|
80,000
|
|
Land
|
38,500
|
Retained earnings
|
23,500
|
|
|
$180,000
|
|
$180,000
|
During 2013, the following occurred.
1. Ellwood House, Inc., sold part of its investment portfolio, which was classified as available-for-sale, for $15,500, resulting in a gain of $500 for the firm.
2. Dividends totaling $19,000 were paid to stockholders.
3. A parcel of land was purchased for $5,500.
4. $20,000 of common stock were issued at par.
5. $10,000 of bonds payable were retired at par.
6. Heavy equipment was purchased through the issuance of $32,000 of bonds.
7. Net income for 2013 was $42,000 after deducting depreciation of $13,550.
8. Both current assets (other than cash) and current liabilities remained at the same amount.
1. Prepare a statement of cash flows for 2013, using the indirect method. Assume that current assets (excluding cash) and current liabilities have remained the same on December 31, 2013. The cash balance on December 31, 2013 is $66,050.
2. Draft a one-page letter to Gerald Brauer, president of Ellwood House, Inc., briefly explaining the changes within each major cash flow category. Refer to your cash flow statement whenever necessary. Provide reference (if any) in APA-format.