Problem 1: The following selected account balances were taken from the general ledger of Vance Corporation as of December 31, 20X7. Examine this information and prepare the property, plant, and equipment section of the company's balance sheet. All accounts listed carry a normal balance.
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Land
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$500,000
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Buildings
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1,650,000
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Equipment
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2,860,000
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Accumulated depreciation: Buildings
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472,000
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Accumulated depreciation: Equipment
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1,333,400
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Depreciation expense: Buildings
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125,000
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Depreciation expense: Equipment
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278,111
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Evaluate the following costs and decide if each is a "capital expenditure" or not. Then, if a capital expenditure, decide which account the cost should be recorded in: Land, Land Improvement, Building, or Equipment. The first item is done as an example.
Problem 2: On January 1, 20X3, Perkins Printing Corporation purchased a digital press for $1,450,000. It cost an additional $50,000 to deliver, install, and calibrate the press. This machine has a service life of 5 years, at which time it is expected that the device will be disposed of for a $100,000 salvage value.
Perkins uses the straight-line depreciation method.
(a) Prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.
(b) Show how the asset and related accumulated depreciation would appear on a balance sheet at December 31, 20X5.
Problem 3: Robinson Corporation recently requested a contractor to prepare a proposal to refurbish the exterior of its office building. Robinson wanted to give its building a "face lift." The contractor provided the following bid document:
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ROBINSON CORPORATION BID
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Add extension to front porch approach
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$20,000
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Install shrubs and trees
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2,500
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Replace rotting exterior siding material
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7,500
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Replace burned out exterior light bulbs
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500
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Total for all work:
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$30,500
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Assume that Robinson Corporation agreed to the bid, and authorized the work. What journal entry would be appropriate for each of the above expenditures?
Problem 4: Ng's Shrimp Company owns a fishing vessel that originally cost $250,000, with a 20-year life, and no anticipated salvage value. Ng uses the straight-line depreciation method. Review the following three independent cases, and prepare the journal entry to reflect the disposition of the boat in each case.
- Case 1 After 8 years of ownership, the boat was taken by a storm.
- Case 2 After 12 years of ownership, the boat was sold for $175,000.
- Case 3 After 15 years of ownership, the boat was sold for $60,000.
Problem 5: On October 1, 20X4, Farmer Engineering Services purchased a new laser surveying instrument. Farmer paid $5,000 down and executed the following promissory note:
(a) Prepare the appropriate journal entry to record the purchase on October 1, 20X4.
(b) Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X4.
Problem 6: The auditing firm of Rossellini and Rossellini was auditing the year-end financial statements of its client, City Center Foods. In the course of the audit, it was discovered that City Center was the defendant in a law suit involving a "food poisoning" case. City Center denies that it sold any tainted food products. City Center's attorney provided a representation letter regarding the ongoing litigation. Following is a portion of the reply received from the attorney:
Dear Ms. Rossellini:
You requested that we furnish you with certain information in connection with your examination of the accounts of City Center Foods, as of December 31, 20X7 . . .
While this firm represents City Center Foods, our engagement has been limited to specific matters involving the ongoing litigation between City Center Foods and Randal Ransom. This response is necessarily limited to those matters. The Company has advised us it does not intend to waive the attorney-client privilege with respect to any information which the Company has furnished to us. Moreover, please be advised that our response to you should not be construed in any way to constitute a waiver of the protection of the attorney
work-product privilege with respect to any of our files involving the Company.
In the matter of Randal Ransom v. City Center Foods: On June 30, 20X7, Randal Ransom filed a civil action in Federal District Court for the Eastern District of Texas alleging that he was significantly damaged by consumption of food products sold by City Center Foods.
He further alleges that City Center Foods knowingly sold such food products and failed to maintain appropriate refrigeration equipment. Mr. Ransom is requesting specific damages of $1,000,000 and such additional amounts as may be awarded by a jury.
This litigation is in its earliest stages, and discovery is not yet complete. At this stage of litigation, it is impracticable to render an opinion about whether the likelihood of an unfavorable outcome is either "probable" or "remote;" however, the Company believes it
has meritorious defenses and is vigorously defending this litigation . . .
Robert Bean, Attorney
(a) What is a contingent liability?
(b) What criteria drive the determination of when/how a contingency should be reported?
(c) How do you believe the litigation described in the attorney's letter should be reported?
Problem 7: SFCC Corporation has 8 employees. Information about the October payroll follows:
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Name
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Hours Worked
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Pay Rate
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Federal Income Tax Withheld
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Breschi, K
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95
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$12 per hour
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$200
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Carballo, P
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n/a
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$3,000 per month
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$850
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Dangelo, J
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180
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$14 per hour
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$625
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Gaines, T
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n/a
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$4,500 per month
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$1,100
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Goseco, M
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n/a
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$10,100 per month
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$3,575
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Skolnick, J
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180
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$12 per hour
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$480
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Williams, R
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172
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$9 per hour
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$140
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Wong, O
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195
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$16 per hour
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$800
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Additional information is as follows:
SFCC is in a state without an income tax. Employees' federal income tax withholdings depend on various factors, and the amounts are as indicated in the above table.
No employees worked overtime, with the exception of Oscar Wong, who worked 15 hours of overtime. Overtime is paid at 150% of the normal hourly rate.
Assume that gross pay is subject to social security taxes at a 6.5% rate, on an annual base of $100,000. Assume that Medicare/Medicaid taxes are 1.5% of gross earnings. These taxes are matched by the employer. Only Marcia Goseco had earned more than $90,000 during the months leading up to October. She had earned $90,900 during that time period.
SFCC has 100% participation in a $10 per month employee charitable contribution program. These contributions are withheld from monthly pay.
SFCC pays for workers' compensation insurance at a 2% of gross pay rate. None of this cost is paid by the employee.
SFCC provides employees with a group health care plan; however, the cost is fully paid by employees. The rate is $250 per month, per employee.
SFCC's payroll is subject to federal (0.5%) and state (1.5%) unemployment taxes on each employee's gross pay, up to $8,000 per year. All employees had earned in excess of $8,000 in the months leading up to October, with the exception of Karen Breschi. Karen was first employed during the month of October.
SFCC contributes 5% of gross pay to an employee retirement program. Employees do not contribute to this plan.
(a) Complete the payroll schedule
(b) Prepare journal entries for SFCC's payroll and the related payroll expenses.
Problem 8: Clear Water Coffee issued $100,000 of 7% bonds on January 1, 20X1. The bonds were issued at par and pay interest on June 30 and December 31 of each year. By December 31, 20X5, the market rate of interest had increased, and Clear Water was able to reacquire and retire the bonds for $97,500, plus accrued interest.
Prepare the journal entry to record the interest payment and bond retirement on December 31, 20X5.
Problem 9: Jacob Joseph has identified five different companies in which he is interested in investing, based upon their products and prospects. However, Jacob is concerned about a general economic downturn and desires to invest in companies with the lowest debt exposure. Following is a list of the data for the five potential investments.
Jacob has compiled the data and has ranked the companies based upon total debt. He has requested your help in evaluating the risk profiles for each company.
To complete your evaluation, you need to know that each company faces an income tax rate that is equivalent B-13.12 Basic bond retirement B-13.13 Debt analysis to 30% of income before taxes (which also means that net income is 70% of income before taxes). In addition, assume that each company incurs an average interest cost that is 8% of total debt.
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Total Assets
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Total Liabilities
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Net Income
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A
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$10,000,000
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$ 1,000,000
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$ 200,000
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B
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20,000,000
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3,000,000
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1,000,000
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C
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6,000,000
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4,000,000
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250,000
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D
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15,000,000
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6,000,000
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1,600,000
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E
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30,000,000
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22,000,000
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4,000,000
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(a) Calculate the debt to total asset ratio, and reorder the list from least risky to most risky, based upon that ratio.
(b) Calculate the debt to equity ratio, and reorder the list from least risky to most risky, based upon that ratio.
(c) Calculate the times interest earned ratio, and reorder the list from least risky to most risky, based upon that ratio.
(d) Do the ratios suggest that risk is a function of total debt, or other factors? Do all the ratios produce the same signals?
Problem 10: Mike Davis Company entered into two lease agreements. One lease was for office space and the other was for office equipment. The office space lease is not a capital lease. It is an operating lease because the risks and rewards of owning the property remain with the lessor (owner of the property). The lease agreement is for 5 years and provides for monthly payments of $2,500. These rent payments are charged to rent expense as incurred. No liability is recorded for the lease contract. The office equipment lease is a capital lease. This lease is also for 5 years. Payments at the end of each month are $2,500, and their present value at the inception of the lease is $112,388. The interest rate implicit in the lease is 1% per month.
(a) Prepare the journal entry needed to record a payment under the office space lease.
(b) Prepare the initial journal entry to record the office equipment lease
(c) How would the financial reporting differ for the office space versus the office equipment?
Problem 11: Each of the following scenarios is independent. Utilize the appropriate future value or present value table, and calculate the requested amount. Then, if available, utilize the related function in an electronic spreadsheet (or financial calculator) to verify your calculation.
(a) How much will a lump sum of $10,000, invested at 7% per annum, grow to in 20 years?
(b) How much will be in account after 2 years, if $50 is placed into the account at the beginning of each month? Assume the account's interest rate is 6%, with monthly compounding.
(c) How much should be set aside today, so that it will grow to $30,000 in 15 years? The discount rate is 9%.
(d) What is the present worth of an income stream that includes annual end-of-period payments of $100,000 for 20 years? Assume the appropriate discount rate is 8% per year.