Reference no: EM131126123

Problem 1

Bestseller Books is a retailer of books and maga¬zines. Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owners' equity increased, decreased or stayed the same).
Assets Liab. Own. Eq.

1. Investment of capital in business by owner.
2. Loan obtained from bank
3. Books purchased from distributor on credit
4. Furniture purchased on credit
5. Payment made to creditor for furniture
6. Furnishings purchased for cash
7. Rent paid in advance for store premises
8. Wages paid to employees at the end of first week
9. Advance received from customer
to supply magazines for one year
10. Books sold to customer for cash

Problem 2

Your company, Rome & Hans, has just completed its first year of operations. Irma, the accounting assistant, has just handed you the list of account balances (below). You are pretty sure that she has the right numbers in the right accounts. Prepare a correct balance sheet in good form before you meet with the boss.

Rome & Hans
Balances as of 12/31/1999

Net income 195,000 Supplies 6,000
Equipment 800,000 Accounts payable 140,000
Inventories 140,000 Accounts receivable 120,000
Notes payable 50,000 Capital stock 780,000
Prepaid rent 15,000 Cash 84,000

Problem 3

Irma (see problem 2) has found several unposted transactions from the last week of December. Her revised balance sheet appears below. What happened during the period?

Rome & Hans
Revised Balance Sheet
as of 12/31/1999

Assets Liabilities & Owners' Equity

Current: Liabilities:
Cash 119,000 Accounts payable 125,000
Accounts receivable 100,000 Notes payable 50,000
Inventories 120,000 Total liabilities 175,000
Supplies 6,000
Prepaid rent 15,000 Owners' Equity:
Total current 360,000 Capital stock 780,000
Noncurrent: Retained Earnings 205,000
Equipment 800,000 Total Owners' 985,000

Total Assets $ 1,160,000 Total LOE $ 1,160,000

Problems to Chapter 2

Problem 1:
You have been hired recently as the new accountant of the Boston Turncoats Company. Your first responsibility is to prepare financial statements for the year 1999. The former accountant has left you with a sheet of computer printout that contains a complete history of the accounts and balances as on 12-31-99. The history is as follows:

Accounts payable $815,000
Accounts receivable 425,000
Accumulated depreciation (bldg) 820,000
Accumulated depreciation (equip) 400,000
Advances from customers 249,000
Buildings 1,800,000
Capital stock 1,600,000
Cash 179,000
Cost of goods sold 1,520,000
Depreciation expense 220,000
Equipment 1,245,000
Insurance expense 73,000
Land 2,033,000
Merchandise inventory (12-31-99) 675,000
Note payable (due 6-30-02) 1,200,000
Prepaid insurance 65,000
Retained earnings (on 1-1-99) 658,000
Sales 2,603,000
Selling expense 110,000

You discover that there are three items yet to be accounted for:

(1) Interest on the note payable for the whole year 1999 was paid only on 1-1-00 and was consequently omitted from the 1999 accounts. The note carries interest at 11 percent per annum and was issued in 1995.
(2) Income tax needs to be accrued for the year 1999. The income tax rate is 30 percent.
(3) Late in December 1999, the company declared a dividend of
$200,0¬00. The dividend is to be paid to stockholders in early 2000.

Required

Prepare an income statement and a retained earnings statement for the year ended December 31, 1999, and a balance sheet as on December 31, 1999. 

Problem 2

Watanabe Clothing Store has the following account balances on January 31, 1999.

Cash $ 68,400
Accounts receivable 46,000
Merchandise inventory 120,000
Equipment 400,000
Accumulated depreciation 150,000
Rent payable 6,200
Accounts payable 40,700
Capital stock 300,000
Retained earnings 137,500

Transactions during February were as follows:

1. Sales (all on account) amounted to $162,000
2. Credit customers paid $130,000 in cash.
3. Merchandise inventory of $99,000 was purchased on account.
4. Inventory on hand at the end of the month was $159,000.
5. Accounts payable of $85,000 were paid.
6. Rent for January of $6,200 was paid in February. February's rent of $6,300 was unpaid.
7. Miscellaneous expenses of $28,000 were paid in cash.
8. Employee salaries of $45,000 were paid.
9. Depreciation expense for the month was $3,000.
10. The income tax rate is 30 percent. Income tax was not paid.

Required: Prepare an income statement for February 1999 and a balance sheet as on February 28, 1999.

Problems to Chapter 3
Problem 1

Toy Town Company is a retailer of toys. The balances of the ledger accounts on January 31, 1999 (the end of Toy Town's fiscal year), prior to the necessary adjustments, were as follows (all amounts in thousands of dollars).
(Dr) (Cr)
Cash $ 609
Accounts receivable 647
Merchandise inventory 2,923
Store equipment 500
Prepaid insurance 115
Advertising expense 54
Sales salaries expense 180
Administrative salaries 80
Miscellaneous expenses 11
Prepaid rent 240
Rent expense 100
Accumulated depreciation $ 150
Notes payable (due 2002) 360
Accounts payable 386
Common stock 400
Retained earnings 163
Sales 4,000
$ 5,459 $ 5,459

Additional information is given below (figures in thousands).

1. Store equipment is being depreciated on a straight line basis. The average life of the equipment is ten years.
2. As inventory is purchased, it is added to the merchandise inven¬tory account. A physical count at the end of January, 1999, showed inventory of $238.
3. Sales salaries are paid monthly, on the first Friday of the week following the end of the month. Sales salaries for January amount¬ed to $20.
4. Prepaid rent represents one year's rental of store buildings, paid in advance on August 1, 1998.
5. The note payable carries annual interest of ten percent. The note was issued on September 1, 1998.
6. The sales figure includes $100 received as an advance from a major customer. Toy Town has placed an order for these toys with one of its suppliers, and expects delivery to be made in two months.
7. The company declared dividends for the year amounting to $50.
8. The income tax rate is 30 percent.
Required
A.Prepare the necessary journal entries to account for the additional information items 1-8 above.
B.Prepare an income statement, retained earnings statement, and balance sheet for Toy Town, all in good form.

Problem 2

State Express Inc. provides overnight package and mail delivery services. The balance sheet of the company on December 31, 1999 is given in Exhibit A. Exhibit B provides a listing of cash receipts and expenditures obtained from the company's cash book. Exhibit C contains additional information that should be considered in prepar¬ing the required statements.

REQUIRED: 1) Prepare an income statement (in good form) for the year 2000.
2) Prepare a balance sheet (in good form) as of December 31, 2000.

EXHIBIT A
State Express Inc.
Balance Sheet
as of December 31, 1999

Assets Equities

Current Assets: Current Liabilities:
Cash $ 191,400 Salaries Payable $ 3,300
Prepaid Rent 15,000 Accounts Payable 18,000
Gasoline Inventory 46,286 Interest Payable 30,000
Unexpired Insurance 42,000 Total 51,300
Total 294,686
Noncurrent liabilities:
Noncurrent Assets: Note payable
Airplanes 2,000,000 (12%, due 1/1/2009) 1,000,000
Acc. Depn 587,000 Stockholders' Equity:
1,413,000 Common Stock 500,000
Automobiles 70,000 Retained Earnings 213,286
Acc. Depn 13,100 Total 713,286
56,900
Total 1,469,900

Total Assets $ 1,764,586 Total Equities $1,764,586

EXHIBIT B
State Express Inc.
Cash Receipts and Disbursements for 2000

Receipts:
Cash Sales $ 280,000
Collections from credit sales 14,000
Proceeds from stock issuance 50,000
Advances from customers 30,000
Total $374,000

Disbursements:
Gasoline cash purchases $ 13,800
Payments to creditors
(for gasoline purchases) 19,000
Wages 86,000
Advertising 5,400
Interest 130,000
Maintenance 7,200
Miscellaneous 5,000
Rent 45,000
Total 311,400
Increase in cash $ 62,600

EXHIBIT C
State Express, Inc.
Summary of Notes
1. Unpaid bills for gasoline purchases were $ 5,000.
2. Unpaid salaries at the end of the year amounted to $4,000.
3. Outstanding customer accounts (to be collected) $ 8,000.
4. Advances from customers refers to payment received from a corpo¬rate customer for services to be provided in 2001.
5. Gasoline inventory at the end of the year was $ 35,000.
6. Prepaid insurance refers to a four year policy taken out on January 1, 1998.
7. The most recent interest payment was made on October 31, 1999.
8. The estimated life of the aircraft is 20 years and for automo¬biles is 7 years.
9. Net income, if any, is taxed at a 30 percent rate.
10. There were no prepayments or accrued expenses other than those noted in Exhibit C.3.

Recognizing Income (Chp. 3 Continued)

Problem 3

Thoroughly Diversified Company (TDC) has a number of operating divisions. In each of the following cases indicate the amount of revenue that you would recommend that TDC should recognize in 1997, briefly providing reasons for your recommendation.

1. The Machine Division signed a contract in 1997 for the sale of $60,000 worth of machinery to the Metal Stamping Company. During 1997, $32,000 worth of machinery were manufactured and delivered under this contract. The Metal Stamping Company has paid $30,000 in 1997. Under the terms of the contract the remaining amount is to be paid in 1998.

2. The Machine Division completed manufacture of $82,000 worth of machinery for which there is no buyer yet. However, this line of machinery has been successful in the past, and the sales department is optimistic about signing a contract with a well established client in early 1998.

3. The Gas Division entered into a long term contract with River¬brook Company. The contract provides for Gas Division to provide gas at fixed prices for five years from July 1, 1997. In 1997, $500,000 worth of gas was supplied under the contract. The normal annual supply will be for $1 million.

4. The Military Equipment Division entered into a contract with the US Navy on January 1, 1997. Under the terms of the contract, Mili¬tary Equipment Division is to supply 30 aircraft to the Navy in 1999. The aircraft are expected to cost the division $300 million to manufacture ($150 million in 1997, $100 million in 1998 and $50 million in 1999), and are being sold to the Navy for $500 million. Actual costs in 1997 were as expected. The Navy made payments amounting to $200 million in 1997 as per the contract.

Problems for Chapter 7
Problem 1The 12/31/97 unadjusted trial balance for ABC Co. shows the following balances:

Debit Credit

Accounts Receivable $800,000

Allowance for Doubtful Accounts $ 3,000

Required:

1. Did the company over or underestimate bad debts at the end of 1996?

2. Assume that this year the company estimates that 8% of accounts receivable will be uncollectible, indicate the necessary adjusting journal entry for bad debts.

3. Assume that on 1/12/98, an account in the amount of $16,000 is deemed uncollectible. Make the necessary journal entry to record this event.

4-6. Answer questions 1-3 assuming that the allowance for doubtful accounts had a $5,000 debit balance prior to adjusting entries instead of the $3,000 credit balance shown above.

Problems to Chapter 8:

Problem 1

General Parts Company has only one product line. In 1999 the company began the year with 1,000 units in inventory that had been purchased for $130 each. Purchases and sales in 1999 were as follows:

January 17 Purchased 3000 units at $125 each
March 25 Purchased 5000 units at $120 each
May 18 Sold 4000 units at $180 each
August 7 Purchased 5000 units at $115 each
October 12 Sold 8000 units at $180 each
December 1 Purchased 1000 units at $110 each

General selling and administrative expenses in 1999 amounted to $300,000. The income tax rate was 40 percent.

Required

1. Prepare income statements for 1999 in good form, assuming General Parts uses (A) the LIFO method in accounting for inventories, and (B) the FIFO method, in both cases applied on a periodic basis.

2. Would the LIFO method have been acceptable if the company was in the business of selling perishable products? Explain.

Problem 2

Rhodes Inc. is a wholesaler of apples. The company's inventory was reported at $150,000 on December 31, 1998, $168,000 on December 31, 1999, and $193,000 on December 31, 2000. The company uses FIFO in accounting for inventory. Cost of goods sold in 2000 was $780,000. The quantity of apples held in inventory was fairly stable over the three years.

Required

1. What was the cost of apples purchased by Rhodes in 2000?

2. Would (a) cost of goods sold in 2000, (b) the current ratio at the end of 2000 and (c) income tax expense in 2000 have been higher, the same, or lower if the company had been using LIFO rather than FIFO for inventories? Explain.

3. Ignoring tax effects, would Rhodes Inc.'s cash flow from opera¬tions be higher, the same, or lower, if it used LIFO instead of FIFO in 2000? Explain.

4. Considering tax effects, would Rhodes Inc.'s cash flow from operations be higher, the same, or lower, if it used LIFO instead of FIFO in 2000? Explain.

Problem 3

The Oliver Company sells chemical compounds made from fasbium. The company uses LIFO for its inventories. The inventory on January 1, 1998 consists of 3,000 lbs. Using LIFO, this was valued on the balance sheet at $45 per lb. Purchases and ending inventories in subsequent years were as follows:

Purchase Dec 31
Year Price/lb Purchases Inventory
1998 $ 50 $384,000 3,600 lbs
1999 50 352,000 2,600 lbs
2000 52 448,000 4,000 lbs

Because of temporary scarcities, fasbium is expected to cost $62 per lb. in 2001. Sales for 2001 are expected to require 7,000 lbs of fasbium. The purchasing manager suggests that the inventory be allowed to decrease to 600 lbs. at the end of 2001. The controller argues that such a policy is foolish. She says that if inventories are allowed to decrease, the company will pay a very large amount in income taxes (at its current income tax rate of 40 percent). She suggests that the company maintain a 2001 year end inventory of 4,000 lbs.

Required

1. Calculate the cost of goods sold and dollar value of ending inventory for the year 2000.

2. Calculate the cost of goods sold and dollar value of ending inventory for 2001, assuming the purchasing manager's advice is followed (Plan A) and the controller's advice is followed (Plan B).

3. Calculate the tax savings for 2001 if the controller's advice is followed rather than the purchasing manager's. If you were making the decision would you agree with the controller or the purchasing manager?

Problem 4

International Terrorists Resources (ITR) is a wholesaler of explo¬sives. In 1994, the company adopted a new product line, Blast-X. The table given below shows the quantities of Blast-X purchased in 1994, 1995 and 1996 and the purchase price, along with ending inven¬tory of Blast-X.

Year Price per ton Purchases Ending Inventory
1994 $750 800 tons 100 tons
1995 $800 1,000 tons 200 tons
1996 $900 1,200 tons 400 tons

The selling price of Blast-X was $1,400 in 1996. The company has a 30 percent tax rate.

Blast-X is a product that becomes unstable with age. It is ITR's practice to ship the product to retail customers on a first-in first-out basis. This ensures that inventory does not remain in the warehouse long enough to create an explosive problem.

Required

1. What would the company have shown as gross margin in 1996 from Blast-X if it used LIFO? What would the cost of ending inventory be on the December 31, 1996 balance sheet?

2. What would the company have shown as gross margin in 1996 from Blast-X if it used FIFO? What would the cost of ending inventory be on the December 31, 1996 balance sheet?

3. What would the tax savings be under LIFO in 1996?

4. Which inventory method would you recommend to the management of the company. Why?

5. FIFO generally produces a higher income than LIFO. However, the opposite has been the case in recent years for a number of US compa¬nies. Indicate two reasons why this might be the case.