Problem 1: Inventory errors and income measurement.
The income statements of Keagle Company for 20X3 and 20X4 follow.
|
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20X3
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20X4
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|
Sales
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$100,000
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$109,000
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|
Cost of goods sold
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62,000
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74,000
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|
Gross profit
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$38,000
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$35,000
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|
Expenses
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26,000
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22,000
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|
Net income
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$12,000
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$13,000
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A recent review of the accounting records discovered that the 20X3 ending inventory had been understated by $4,000.
Required:
a. Prepare corrected 20X3 and 20X4 income statements.
b. What is the effect of the error on ending owner's equity for 20X3 and 20X4?
Problem 2: Inventory valuation methods: computations and concepts.
Wave Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:
1/3: 100 boards @ $125
3/17: 50 boards @ $130
5/9: 5/9: 246 boards @ $140
7/3: 400 boards @ $150
10/23: 74 boards @ $160
Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system.
Required:
a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:
i. First-in, first-out
ii. Last-in, first-out
iii. Weighted average
b. Which of the three methods would be chosen if management's goal is to:
i. Produce an up-to-date inventory valuation on the balance sheet?
ii. Approximate the physical flow of a sand and gravel dealer?
iii. Report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices?
Problem 3: Depreciation methods.
Betsy Ross Enterprises purchased a delivery van for $30,000 in January 20X7. The van was estimated to have a service life of 5 years and a residual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:
a. Units-of-output, assuming 17,000 miles were driven during 20X8
b. Straight-line
c. Double-declining-balance
Problem 4: Depreciation computations.
Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $1,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:
a. The machine's book value on December 31, 20X5, assuming use of the straight-line depreciation method.
b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.
c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.
Problem 5: Depreciation computations: change in estimate.
Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3-20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.
Required:
a. Compute depreciation for 20X3-20X7 by using the following methods: straight line, units of output, and double-declining-balance.
b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company's depreciation expense for 20X5.
c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.
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