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BE9-3 Conlin Company acquires a delivery truck at a cost of $42,000.The truck is expected to

have a salvage value of $6,000 at the end of its 4-year useful life. Compute annual depreciation

for the first and second years using the straight-line method.

 

BE9-4 Ecklund Company purchased land and a building on January 1, 2011. Management’s

best estimate of the value of the land was $100,000 and of the building $200,000. But management

told the accounting department to record the land at $220,000 and the building at $80,000.

The building is being depreciated on a straight-line basis over 20 years with no salvage value.

Why do you suppose management requested this accounting treatment? Is it ethical?

 

BE9-5 Depreciation information for Conlin Company is given in BE9-3. Assuming the

declining-balance depreciation rate is double the straight-line rate, compute annual depreciation

for the first and second years under the declining-balance method.

 

BE9-9 Prepare journal entries to record the following.

(a) Gomez Company retires its delivery equipment, which cost $41,000. Accumulated depreciation

is also $41,000 on this delivery equipment. No salvage value is received.

(b) Assume the same information as (a), except that accumulated depreciation is $39,000, instead

of $41,000, on the delivery equipment.

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1. Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. non-trade receivables. c. trade receivables. d. merchandise receivables. 2. The term “receivables” refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors. 3. Receivables are a. One of the most liquid assets and thus are always considered current assets. b. Claims that are expected to be collected in cash. c. Shown on the Income Statement at cash realizable value. d. Always the result of revenue recognition. 4. Accounts receivable are valued and reported on the balance sheet a. in the investment section. b. at gross amounts less sales returns and allowances. c. at cash realizable value. d. only if they are not past due. 5. The Allowance for Doubtful Accounts is necessary because a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay. b. uncollectible accounts that are written off must be accumulated in a separate account. c. a liability results when a credit sale is made. d. management needs to accumulate all the credit losses over the years. 6. The account Allowance for Doubtful Accounts is classified as a(n) a. liability. b. contra account of Bad Debt Expense. c. expense. d. contra account to Accounts Receivable. 7. Under the allowance method, Bad Debt Expense is recorded a. when an individual account is written off. b. when the loss amount is known. c. for an amount that the company estimates it will not collect. d. several times during the accounting period. 8. The matching principle a. requires that all credit losses be recorded when an individual customer cannot pay. b. necessitates the recording of an estimated amount for bad debts. c. results in the recording of a known amount for bad debt losses. d. is not involved in the decision of when to expense a credit loss. 9. Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts. b. affects both balance sheet and income statement accounts. c. affects only income statement accounts. d. is not acceptable practice. 10. An aging of a company’s accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debts Expense for $4,000. b. debit to Allowance for Doubtful Accounts for $2,800. c. debit to Bad Debts Expense for $2,800. d. credit to Allowance for Doubtful Accounts for $4,000. 11. Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible. 12. Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method. 13. Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading “Other Assets.” d. is deducted from accounts receivable. 14. Papa Bear Corporation’s unadjusted trial balance includes the following balances (assume normal balances): • Accounts Receivable $1,119,000 • Allowances for Doubtful Accounts $ 21,300 Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense will the company record? a. $67,140 b. $45,840 c. $44,562 d. $68,418 15. The interest on a $3,000, 9%, 90-day note receivable is a. $67.50. b. $270.00. c. $22.50. d. $45.00. 16. The financial statements of the Bolton Manufacturing Company reports net sales of $500,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the receivables turnover ratio for Bolton? a. 7 times b. 10 times c. 16.7 times d. 12.5 times 17. The financial statements of the Bolton Manufacturing Company reports net sales of $500,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days? a. 52.1 b. 29.2 c. 21.9 d. 36.5 18. Which of the following would not be included in the Equipment account? a. Installation costs b. Freight costs c. Cost of trial runs d. Electricity used by the machine 19. The four subdivisions for plant assets are a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment. c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land. 20. Sanchez Company acquires land for $65,000 cash. Additional costs are as follows: Removal of shed $ 500 Filling and grading 1,500 Salvage value of lumber of shed 320 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 850 Sanchez will record the acquisition cost of the land as a. $68,660. b. $69,300. c. $68,980. d. $65,000. 21. Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements. 22. Stories Company purchased equipment and these costs were incurred: Cash price $22,500 Sales taxes 1,800 Insurance during transit 320 Installation and testing 430 Total costs $25,050 Stories will record the acquisition cost of the equipment as a. $22,500. b. $24,300. c. $24,620. d. $25,050. 23. Upton Company purchased equipment on January 1 at a list price of $50,000, with credit terms 2/10, n/30. Payment was made within the discount period. Upton paid $2,500 sales tax on the equipment, and paid installation charges of $880. Prior to installation, Upton paid $2,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. $52,380 b. $54,380 c. $55,380 d. $50,500 24. The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset. 25. Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n) a. equal and equitable manner. b. accelerated and accurate manner. c. systematic and rational manner. d. conservative market-based manner. 26. Recording depreciation each period is necessary in accordance with the a. going concern principle. b. cost principle. c. matching principle. d. asset valuation principle. 27. Equipment was purchased for $17,000 on January 1, 2006. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2007, if the straight-line method of depreciation is used? a. $6,680. b. $3,340. c. $2,860. d. $5,720. 28. Which of the following methods of computing depreciation is production based? a. Straight-line b. Declining-balance c. Units-of-activity d. None of these Use the following information for questions 29-31. Brinkman Corporation bought equipment on January 1, 2007 .The equipment cost $90,000 and had an expected salvage value of $15,000. The life of the equipment was estimated to be 6 years. 29. The depreciable cost of the equipment is a. $90,000 b. $75,000 c. $50,000 d. $12,500 30. The depreciation expense using the straight-line method of depreciation is a. $17,500 b. $18,000 c. $12,500 d. none of the above 31. The book value of the equipment at the beginning of the third year would be a. $90,000 b. $75,000 c. $65,000 d. $25,000 32. Ace Corporation sold equipment for $12,000. The equipment had an original cost of $36,000 and accumulated depreciation of $18,000. As a result of the sale, a. net income will increase $12,000. b. net income will increase $6,000. c. net income will decrease $6,000. d. net income will decrease $12,000. 33. Using the following data for Happy Home Industries, compute the return on assets ratio. Net Income $ 100,000 Total Assets 12/31/07 2,410,000 Total Assets 12/31/06 1,980,000 Net Sales 250,000 a. 4.1% b. 10.4% c. 4.6% d. 11.4% 34. During 2007, Sitter Corporation reported net sales of $2,000,000, net income of $1,200,000, and depreciation expense of $100,000. Sitter also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Sitter’s asset turnover ratio is a. 2 times. b. 1.6 times. c. 1.3 times. d. .96 times. 35. Current liabilities are due a. but not receivable for more than one year. b. but not payable for more than one year. c. and receivable within one year. d. and payable within one year. 36. The interest charged on a $100,000 note payable, at the rate of 6%, on a 90-day note would be a. $6,000. b. $3,333. c. $1,500. d. $500. 37. The interest charged on a $50,000 note payable, at the rate of 6%, on a 60-day note would be a. …………………………………………………………………………………… $3,000. b. …………………………………………………………………………………… $1,500. c. …………………………………………………………………………………… $750. d. …………………………………………………………………………………… $500. 38. Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid. 39. On January 1, 2007, Brunson Company, a calendar-year company, issued $400,000 of notes payable, of which $100,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2007, is a. Current Liabilities, $400,000. b. Long-term Debt , $400,000. c. Current Liabilities, $100,000; Long-term Debt, $300,000. d. Current Liabilities, $300,000; Long-term Debt, $100,000. 40. Two sisters operate a bed and breakfast on the coast of Maine. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made? a. Cash Unearned Revenue b. Cash Earned Revenue c. Unearned Revenue Earned Revenue d. Cash Sales 41 Secured bonds are bonds that a. are in the possession of a bank. b. can be converted into common stock. c. have specific assets of the issuer pledged as collateral. d. mature in installments. 42. A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. a bond certificate. b. a bond debenture. c. trading on the equity. d. a convertible bond. 43. The present value of a bond is also known as its a. face value. b. market price. c. future value. d. deferred value. 44. If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated rate of interest is increased. 45. On January 1, 2007, $1,000,000, 5-year, 10% bonds, were issued for $1,060,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize premium on bonds payable, the monthly amortization amount is a. $8,833. b. $12,000. c. $1,200. d. $1,000. 46. Two thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance is a. Cash ………………………………………………………………………… 2,040,000 Bonds Payable …………………………………………………… 2,040,000 b. Cash ………………………………………………………………………… 2,000,000 Premium on Bonds Payable…………………………………………. 40,000 Bonds Payable …………………………………………………… 2,040,000 c. Cash ………………………………………………………………………… 2,040,000 Premium on Bonds Payable…………………………………. 40,000 Bonds Payable …………………………………………………… 2,000,000 d. Cash ………………………………………………………………………… 2,040,000 Discount on Bonds Payable …………………………………. 40,000 Bonds Payable …………………………………………………… 2,000,000 47. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2007, contained the following accounts. 5-year Bonds Payable 8% $1,000,000 Bond Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 mo.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries Payable 18,000 Taxes Payable (due 3/15 of next yr) 25,000 The total long-term liabilities reported on the balance sheet are a. $1,365,000 b. $1,350,000 c. $1,465,000 d. $1,450,000 48. The 2007 financial statements of Shadow Co. contain the following selected data (in millions). Current Assets $ 75 Total Assets 120 Current Liabilities 40 Total Liabilities 85 Cash 8 Interest Expense 5 Income Taxes 10 Net Income 16 The debt to total assets ratio is a. 70.8% b. 53.3% c. 1.41% d. 6.2 times 49. Sunwood Company issued $500,000 of 6%, 5-year bonds at 98, which pays interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $490,000 b. $491,000 c. $492,000 d. $494,000 50. When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the a. face value of the bonds at the beginning of the period by the contractual interest rate. b. face value of the bonds at the beginning of the period by the effective interest rate. c. carrying value of the bonds at the beginning of the period by the contractual interest rate. d. carrying value of the bonds at the beginning of the period by the effective interest rate.

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12-4 EAC Approach You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $57,000, has a five-year life, and has an annual OCF (after tax) of −$10,000 per year. The Keebler CookieMunster costs $90,000, has a seven-year life, and has an annual OCF (after tax) of −$8,000 per year. If your discount rate is 12 percent, what is each machine’s EAC?

 

12-6 Project Cash Flows KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciation; they total $50,000. The machine has an expected life of three years and a $75,000 estimated resale value. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be?

 

12-8 After-Tax Cash Flow from Sale of Assets If the lathe in the previous problem can be sold for $5,000 at the end of year 3, what is the after-tax salvage value?

 

· Complete chapter 12 problem 13. In addition to calculating the project cash flows, compute the NPV and IRR. Given a 10% cost of capital, would you recommend pursuing the project?

12-13 Project Cash Flows You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets, which can be depreciated using bonus depreciation. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What will the cash flows for this project be?

 

 

 

 

 

 

· Complete integrated mini-case (p 424). In addition to calculating the project cash flows, compute the NPV and IRR.  Given a 12% cost of capital, would you recommend pursuing the project?

integrated mini-case: Project Cash Flows

Your company, Dawgs “R” Us, is evaluating a new project involving the purchase of a new oven to bake your hotdog buns. If purchased, the new oven will replace your existing oven, which was purchased seven years ago for a total installed price of $1 million. You have been depreciating the old oven on a straight-line basis over its expected life of 15 years to an ending book value of $250,000, even though you expect it to be worthless at the end of that 15-year period. The new oven will cost $2 million and will fall into the MACRS five-year depreciation class life. You cannot use bonus depreciation or Section 179 expensing on the new oven. If you purchase the new oven, you expect it to last for eight years. At the end of those eight years, you expect to be able to sell it for $100,000. (Note that both of the ovens, old and new, therefore have an effective remaining life of eight years at the time of your analysis.) If you do purchase the new oven, you estimate that you can sell the old one for its current book value at the same time. The advantages of the new oven are twofold: Not only do you expect it to reduce the before-tax costs on your current baking operations by $75,000 per year, but you will also be able to produce new types of buns. The sales of the new buns are expected to bring your company $200,000 per year throughout the eight-year life of the new oven, while associated costs of the new buns are only expected to be $80,000 per year. Since the new oven will allow you to sell these new products, you anticipate that NWC will have to increase immediately by $20,000 upon purchase of the new oven. It will then remain at that increased level throughout the life of the new oven to sustain the new, higher level of operations. Your company uses a required rate of return of 12 percent for such projects, and your incremental tax rate is 21 percent. What will be the total cash flows for this project?

 

Cornett, Marcia; Cornett, Marcia. Finance: Applications and Theory (p. 424). McGraw-Hill Higher Education. Kindle Edition.

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Instructions
Identify by number the accounting assumption, principle, or constraint that describes each situation below.
Do not use a number more than once.

a. Is the rationale for why plant assets are not reported at liquidation value. (Do not use the cost principle.)

b. Indicates that personal and business record-keeping should be separately maintained.

c. Ensures that all relevant financial information is reported.

d. Assumes that the dollar is the “measuring stick” used to report on financial performance.

e. Requires that accounting standards be followed for all significant items.

f. Separates financial information into time periods for reporting purposes.

g. Requires recognition of expenses in the same period as related revenues.

h. Indicates that fair value changes subsequent to purchase are not recorded in the accounts.

Exercise 4-3

Identify the violated assumption, principle,or constraint.

Here are some accounting reporting situations.

a. Dorfner Company recognizes revenue at the end of the production cycle but before sale. The price of the product, as well as the amount that can be sold, is not certain.

b. Rayms Company is in its fifth year of operation and has yet to issue financial statements. (Do not use the full disclosure principle.)

c. Tariq, Inc. is carrying inventory at its original cost of $100,000. Inventory has a fair value of $110,000.

d. Leer Hospital Supply Corporation reports only current assets and current liabilities on its balance sheet. Property, plant, and equipment and bonds payable are reported as current assets and current liabilities, respectively. Liquidation of the company is unlikely.

e. Kim Company has inventory on hand that cost $400,000. Kim reports inventory on its balance sheet at its current fair value of $425,000.

f. Kris Piwek, president of Classic Music Company, bought a computer for her personal use. She paid for the computer by using company funds and debited the “Computers” account.

Instructions For each situation, list the assumption, principle, or constraint that has been violated, if any. Some of these assumptions, principles, and constraints were presented in earlier chapters. List only one answer for each situation.

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Answer the following:

1. How does the automated system improve the efficiency and timeliness of financial

statements?

 

 

2. How does the automated system enhance the relevance of the information provided?

 

 

3. How does the automated system enhance the decision making process?

Select the correct answer and show your calculations for the following questions:

 

 

4. At the beginning of the year, a company’s balance sheet reported the following balances: Total

Assets = $125,000; Total Liabilities = $75,000; and Owner’s Capital = $50,000. During the year,

the company reported revenues of $46, 000 and expenses of $30, 000. In addition, owner’s

withdrawals for the year totaled $20,000. Assuming no other changes to owner’s capital, the

balance in the owner’s capital account at the end of the year would be:

A. $66,000

B. $86,000

C. $(4,000)

D. $46,000

E. $54,000

 

5. A company had average total assets of $982,450 and net income of $190,700 and reports

various segment information. Segment A had average total assets of $437,800 and segment

operating income of $98,230. Segment B had average assets of $151,200 and segment operating

income of $16,190. Calculate the segment return on assets for Segment A.

A. 19.4%

B. 22.4%

C. 26.1%

D. 10.7%

E. 20.2%

 

 

 

6. Use the information in the adjusted trial balance presented below to calculate current assets for

Jones Company:

 

Account Title                                 Dr.                            Cr.

Cash                                             23,000

Accounts receivable                  16,000

Prepaid insurance                       6,600

Equipment                                100,000

Accumulated Depreciation‐Equipment                   50,000

Land                                              95,000

Accounts payable                                                        17,000

Interest payable                                                             2,400

Unearned revenue                                                         5,000

Long‐term notes payable                                           30,000

J. Jones,  Capital                                                       136,200

Totals                                           240,600                 240,600

 

A. $21,200

B. $45,600

C. $24,400

D. $95,600

E. $41,200