Reference no: EM13923240

1. At the end of the period it is necessary to close all temporary accounts. (1) Explain why this process is required and (2) provide an example of the closing of an expense account, Supplies Expense in the form of a journal entry.

1)To update the balance in the owner's capital account, accountants close revenue, expense, and drawing accounts at the end of each fiscal year or, occasionally, at the end of each accounting period. 2)In order to close Utilities Expense, the following journal entry is used: Debit (DR) Income Summary Credit (CR) Utilities Expense

2. As required to complete Course Project 1, one must follow the cycle that includes 10 steps to complete the accounting cycle. (1) Explain how to construct an Unadjusted Trial Balance and (2) provide an example of the application of the debit/credit rules in the development of the trial balance.

1. Explain how to construct an unadjusted trial balance An unadjusted trial balance is prepared after the posting of transactions in the ledger accounts. A before-adjustment balance is calculated in every ledger account which is carried over to the unadjusted trial balance. As the name implies, the balances that appear in this trial balance are before making any adjustments like depreciation expense, prepaid rent or insurance etc. There would be a column each for the account number, the account title, a debit column and a credit column. A debit balance in ledger account will be taken to the debit side of the trial balance and a credit balance in the ledger account will be taken to the credit side of the trial balance. At last, the total of the debit and credit columns should tally. A debit balance in ledger account will be taken to the debit side of the trial balance and a credit balance in the ledger account will be taken to the credit side of the trial balance. At last, the total of the debit and credit columns should tally Example: Let us assume the following ledger accounts and balances (before adjustments): Ledger balances: Cash Debit $5,000 A/R Debit $4,000 Prepaid rent Debit $2,000 Furniture Debit $10,000 Accumulated dep. Credit $2,000 A/P Credit $6,000 Capital Credit $10,000 Revenue Credit $7,000 Cost of goods sold Debit $3,000 Selling & admin.Expenses Debit $1,000 Rent expense Debit $0 An unadjusted trial balance would be prepared as follows: Account Titles Debits Credits Cash $5,000 Accounts receivable $4,000 Prepaid rent $2,000 Furniture $10,000 Accumulated depreciation $2,000 Accounts payable $6,000 Capital $10,000 Sales revenue $7,000 Cost of goods sold $3,000 Selling & admin. Expenses $1,000 Rent expense $0 Totals $25,000 $25,000 The debit/credit rules are: * Credit all incomes and gains * Debit all expenses * Debit what comes in (asset) and credit what goes out (sale of asset). * Credit all liabilities (like accounts payable, accrued expenses) * All assets should be debited and all liabilities and capital should be credited.

3.  Internal Control Procedures are required to safeguard company assets and to ensure ethical operation of the business. (1) Explain how limited access can satisfy the purpose of internal control and (2) provide an example of how this control could be implemented.

4. Inventory valuation methods determine the cost of goods sold and the inventory balance. (1) Explain how the Last in First out (LIFO) method is applied and (2) provide an example of the impact that this method of inventory valuation will have on Gross Profit.

1)This method is quite straightforward; it takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory. 2)In our bakery example, the average cost for inventory would be $1.125 per unit, calculated as [(200 x $1) + (200 x $1.25)]/400.

5. To evaluate the financial operation and health of a business ratio analysis is used. (1) Provide the formula for the Acid-test (or Quick) Ratio and explain how it is computed and (2) provide an example of how this ratio can be used in decision-making in business.

1)The formula for Accounts Receivable Turnover is net credit sales divided by average accounts receivable. 2)By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

1. BagODonuts Company bought a used delivery truck on January 1, 2010, for $19,200. The van was expected to remain in service 4 years (30,000 miles). BagODonuts' accountant estimated that the truck's residual value would be $2,400 at the end of its useful life. The truck traveled 8,000 miles the first year, 8,500 miles the second year, 5,500 miles the third year, and 8,000 miles in the fourth year.

1. Calculate depreciation expense for the truck for each year (2010-2013) using the:
a. Straight-line method.
b. Double-declining balance method.
c. Units of Production method.
(For units-of-production and double-declining balance, round to the nearest two decimals after each step of the calculation.
2. Which method best tracks the wear and tear on the van?
3. Which method would BagODonuts prefer to use for income tax purposes? Explain in detail why BagODonuts prefers this method.

1a. Straight-line Method ($19200 - $2400)/ 4 = $5600 1b. Double-declining method: 1st = $9,600 2nd= $4,800 3rd = $2,400 1c. Depreciation Cost = Original Cost - Salavage Value = $16800 Depreciation per Unit = $16800 / 30000 miles = 0.56 Yr 1 - .56 x 8000 = 4480, Yr 2 .56 x 8500 = 4760, Yr 3 .56 x 5500 = 3080, Yr 4 .56 x 8000 = 4480 2. Which best tracks the wear and tear on the van? Units of production method 3. Which method BagODonuts prefer to use for income tax purposes? Explain why BagODonuts chose this one: Double Declining Balance would be chosen because it provides the greatest reduction in taxable income. This will free up more money to grow the business and invest in more assets.

2. ABC Inc. was incorporated on 1/15/12. Their corporate charter authorized the following capital stock:
Preferred Stock: 7%, par value $100 per share, 100,000 shares.
Common Stock: $1 par value, 500,000 shares.

The following transactions occurred during the year:

1/19/12 - Issued 100,000 shares of common stock for $17 cash per share.
1/31/12 - Issued 3,000 shares of preferred stock for $115 cash per share.
11/1/12 - Repurchased 30,000 shares of common stock for $22 cash per share.
12/1/12 - Declared and paid a total dividend of $95,000.

Required:
1. Prepare the journal entry for each transaction listed above.
2. In your own words, explain the main differences between common and preferred stock.

ABC Company 1. 1/19 Cash 1,700,000.00 Common Stock 100,000.00 Capital in excess of par 1,600,000.00 (Issued Common Stock) 1/31 Cash 345,000.00 Preferred Stock 300,000.00 Capital in excess of par 45,000.00 (Issued preferred shares) 11/1 Stock Repurchase 660,000.00 Cash 660,000.00 Reacquired common shares 12/1 Dividends 95,000.00 Cash 95,000.00 Declared and paid cash dividends 2. Preferred stock is a type of capital stock which has specific dividends that is distributed first before common stockholders can receive any dividends declared and paid. In the event of liquidation, preferred stockholders are prioritized first before common stockholders can receive any remaining assets of the company. Common stock enjoys voting rights which preferred stock don't have. Common stock receives dividends only after the preferred dividends are satisfied first. And if the business is liquidated, it receives any remaining assets only after creditors and preferred shareholders have been paid or satisfied.

3. Fraud is an intentional misrepresentation of facts, made for the purpose of persuading another party to act in a way that causes injury or damage to that party. In our readings and discussions we have seen several examples of fraud in business. Using that experience (1) provide an example of a common fraudulent practice in business with an explanation of how the practice works and (2) name and describe each of the elements of the Fraud Triangle.

1. Securities or investment fraud, is a deceptive practice that induces investors to make purchases or sale decisions on the basis of false information. This can include embezzlement, insider trading, misstatements on company financial records, and other illegal acts. 2. The three key elements in the fraud triangle are motive, rationalization, and opportunity. Motive is what causes the person to commit the fraud and usually results from either critical need or greed on the part of the person. Opportunity is what gives way to commit the fraud usually due to weak internal controls, improper access or lax ethical practices. Finally rationalization, the person committing the fraud convinces themselves that they deserve this, or that they are doing it because no one treats them fairly or that simply everyone else does it.

4. Internal Control Procedures are in place to protect the assets of every business as mentioned in the textbook and our discussions. Of the seven internal control procedures, list five of these controls and describe how each procedure is implemented.

Smart Hiring Practices and Separation of Duties, Comparisons and Compliance Monitoring, Adequate Records, Limited Access, and Proper Approvals are 5 internal controls. With Smart hiring practice each person in the information chain is important. The chain should start with hiring. Background checks should be conducted on job applicants. smart management separates three key duties: asset handling, record keeping, and transaction approval so there is no opportunity for 1 person to commit fraud. Comparisons and Compliance Monitoring ensures that no person or department should be able to completely process a transaction from beginning to end without being cross-checked by another person or department. This will reduce errors and establish a chain of command. Adequate Records provide the details of business transactions. The general rule is that all major groups of transactions should be supported by either hard copy documents or electronic records. This will create a traceable paper trail. Limited Access - complements segregation of duties, company policy should limit access to assets only to those persons or departments that have custodial responsibilities. For example, access to cash should be limited to persons in the treasurer's department. Proper Approvals ensures no transaction should be processed without management's general or specific approval. The bigger the transaction, the more specific approval it should have. Checks and balances will keep mistakes and fraud to minimum.

5.  Below are the accounts of Super Pool Service, Inc. The accounts have normal balances on June 30, 2012. The accounts are listed in no particular order.
Account Balance
Common stock $5,100
Accounts payable $4,400
Service revenue $17,100
Land $28,800
Note payable $9,500
Cash $5,200
Dividends $6,100
Utilities expense $2,100
Accounts receivable $10,600
Delivery expense $700
Retained earnings $25,600
Salary expense $8,200
Prepare the company's trial balance as of June 30, 2012, listing accounts in proper sequence, as illustrated in the chapter. For example, Accounts Receivable comes before Land. List the expense with the largest balance first, the expense with the next largest balance second, and so on.

Super Pool Service, Inc. Trial balance 30-Jun-12 Debit Credit Cash DR $5,200 Accounts receivable DR $10,600 Land DR $28,800 Accounts payable CR $4,400 Note payable CR $9,500 Common stock CR $5,100 Retained earnings CR $25,600 Dividends DR $6,100 Service revenue CR $17,100 Salary expense DR $8,200 Utilities expense DR $2,100 Delivery expense DR $700 Total $61,700 $61,700

6. Linda's Lampshades started business on Jan. 1, 2001. They had the following inventory transactions:
Journals - Jan. 2001
Purchases
Supplier Date Received Quantity Unit Cost Amount
Donna 01/10/01 110 12.00 1320.00
Thomas 01/15/01 160 14.00 2240.00
Cindy 01/18/01 150 15.00 2250.00
Sales
Customer Date shipped Quantity Sel. Price Amount
Norilene 01/16/01 200 25.00 5000.00

1. Calculate the ending inventory, using the perpetual inventory method:

A. Using FIFO

B. Using LIFO
C. Using Average Cost
2. Prepare the following statement

Using
FIFO LIFO Average Cost
Sales
Cost of Sales

Gross Profit

Req.1 Ending Inventory (220 units) Workings down... A. Using FIFO 3,230 B. Using LIFO 3,090 C. Using Average Cost 3,173 Req.2 FIFO LIFO Average Sales 5000 5000 5000 Cost of Sales 2,580 2,720 2,637 Gross profit 2,420 2,280 2,363 WORKINGS FIFO Purchases Cost of sales Ending Inventory Date Quantity Unit Cost Amount Quantity Unit Cost Amount Quantity Unit Cost Amount 1.10.01 110 12.00 1,320 110 12 1320 1.15.01 160 14.00 2,240 110 12 1320 160 14 2240 1.16.01 110 12 1,320 90 14 1,260 70 14 980 1.18.01 150 15.00 2,250 70 14 980 150 15 2,250 LIFO Purchases Cost of sales Ending Inventory Date Quantity Unit Cost Amount Quantity Unit Cost Amount Quantity Unit Cost Amount 1.10.01 110 12.00 1,320 110 12 1320 1.15.01 160 14.00 2,240 110 12 1320 160 14 2240 1.16.01 160 14 2,240 40 12 480 70 12 840 1.18.01 150 15.00 2,250 70 12 840 150 15 2,250 Wgt. Avg. Purchases Cost of sales Ending Inventory Date Quantity Unit Cost Amount Quantity Unit Cost Amount Quantity Unit Cost Amount 1.10.01 110 12.00 1,320 110 12 1320 1.15.01 160 14.00 2,240 270 13 3,560 1.16.01 200 13 2,637 70 13 923 1.18.01 150 15.00 2,250 220 14 3,173