1. A building owned by Hopewell Company was recently valued at $850,000 by a real estate expert. The president of the company is questioning the accuracy of the firm’s latest balance sheet because it shows a book value of $550,000 for the building. How would you explain this situation to the president? 2. At the beginning of the year, Mandela Company purchased a new building and some expensive new machinery. An officer of the firm has asked you whether this purchase will affect the firm’s year-end income statement. What answer would you give? 3. Suppose the president of a company where you work as an accountant questions whether it is worthwhile for you to spend time making adjustments at the end of each accounting period. How would you explain the value of the adjustments? 4. How does the worksheet help provide vital information to management? Internal Controls for Journal Entries Journal entries and adjusting journal entries can be used to conceal theft of company assets as well as to inflate a company’s profits or deflate company losses. One of the biggest bankruptcies and biggest accounting scandals in the United States occurred at a company called WorldCom. To hide falling profitability, WorldCom recorded expenses as investments, which increased its profits by the amount of the expenses that were capitalized. To hide the theft of supplies, an employee might hide the theft by making an adjusting entry to cover up the supplies taken. Suppose a company purchases supplies during the period of $10,000 and actually has $5,000 of supplies on hand at the end of the period. If an employee steals $2,000 of supplies, to cover it up the employee makes an adjusting journal entry debiting Supplies Expense for $7,000 (instead of $5,000) and credits Supplies for $7,000 (instead of $5,000). The commission of fraudulent accounting crime by WorldCom and several other companies led to the passage of the Sarbanes-Oxley Act in 2002. The Sarbanes Oxley Act (discussed in Chapter 1) strengthened accounting disclosure requirements and significantly increased penalties for fraudulent accounting. To prevent journal entry fraud, what are some basic internal control procedures for recording journal entries (including adjusting journal entries) that should exist in every company? Depreciation DuPont reported depreciation expense of $1,308 million on its consolidated financial statements for the period ended December 31, 2018. The following excerpt is taken from the company’s consolidated balance sheet for the same year: December 31, 2018 Property, Plant and Equipment $13,906 Less: Accumulated depreciation 1,720 Net property, plant, and equipment $12,186 Analyze: 1. What percentage of the original cost of property, plant, and equipment was depreciated during 2018? 2. What percentage of property, plant, and equipment cost was depreciated as of December 31, 2018? 3. If the company continued to record depreciation expense at this level each year, how many years remain until all assets would be fully depreciated? (Assume no salvage values.) Analyze Online: Connect to the DuPont website (www.dupont.com). Click on the Investors link to find information on quarterly earnings. 4. What is the most recent quarterly earnings statement presented? What period does the statement cover? 5. For the most recent quarter, what depreciation expense was reported? Matching Expenses and Revenue Edward Foster is a building contractor. He and his customer have agreed that he will submit a bill to them when he is 25 percent complete, 50 percent complete, 75 percent complete, and 100 percent complete. For example, he has a $300,000 room addition. When he has completed 25 percent, he will bill his customer $25,000. The problem occurs when he is 40 percent complete and has incurred expenses but cannot bill his customer. How can his revenue and expenses match? Discuss in a group several ways that Edward’s accountants could solve this problem. What accounts would be used?
> What three procedures are performed at the end of each accounting period before the financial information is interpreted?
> Name the steps of the accounting cycle.
> How does the straight-line method of depreciation work?
> Are the following assets depreciated? Why or why not? a. Prepaid Insurance b. Delivery Truck c. Land d. Manufacturing Equipment e. Prepaid Rent f. Furniture g. Store Equipment h. Prepaid Advertising i. Computers
> Sticky Inc. makes candy. The continuous production operation starts in the mixing department, where the chocolate, sugar, water, and other ingredients are blended. It then moves to the second department (cooking), where the ingredient mix is heated and p
> Why is an accumulated depreciation account used in making the adjustment for depreciation?
> How does a contra asset account differ from a regular asset account?
> What is book value?
> What three amounts are reported on the balance sheet for a long-term asset such as equipment?
> Why is it necessary to journalize and post adjusting entries?
> What effect does each item in Question 1 have on owner’s equity?
> A firm purchases machinery, which has an estimated useful life of 10 years and no salvage value, for $60,000 at the beginning of the accounting period. What is the adjusting entry for depreciation at the end of one month if the firm uses the straight-lin
> What adjustment would be recorded for expired insurance?
> What are prepaid expenses? Give four examples.
> Why is it necessary to make an adjustment for supplies used?
> Selected data about the operations of the mixing department, the first department of Red Manufacturing, Inc., for November 20X1 follows. At the beginning of the month, there were 1,000 units in process with total costs of $48,000. Included in the total w
> Give three examples of assets that are subject to depreciation.
> What effect does each of the following items have on net income? a. The owner withdrew cash from the business. b. Credit customers paid on outstanding balances that were past due. c. The business bought equipment on account. d. The business journalized a
> What procedure is used to record an entry in the general journal?
> What is the value of having a description for each general journal entry?
> What is a compound journal entry?
> What is the accounting cycle?
> What are posting references? Why are they used?
> What is Posting?
> What is a ledger?
> In what order are accounts arranged in the general ledger? Why?
> The job order cost sheets for Nash Inc. show the following information about special orders for June and July of the current year: The company prices its jobs to make a 50 percent gross profit on sales. Operating expenses for July totaled $7,500, and the
> What is an audit trail? Why is it desirable to have an audit trail?
> How should corrections be made in the general journal?
> What is the purpose of a journal?
> Why is Prepaid Rent considered an asset account?
> The terms debit and credit are often used in describing the effects of transactions on different accounts. What do these terms mean?
> Indicate whether each of the following types of account would normally have a debit balance or a credit balance: a. An asset account b. A liability account c. The owner’s capital account d. A revenue account e. An expense account
> How is the balance of an account determined?
> Accounts are classified as permanent or temporary accounts. What do these classifications mean?
> When a chart of accounts is created, number gaps are left within groups of accounts. Why are these number gaps necessary?
> In what order do accounts appear in the chart of accounts?
> John Manufacturing Company manufactures one product that has several model styles. All materials are added at the beginning of production. Manufacturing overhead is applied as a percentage of direct labor cost. On January 1, 20X1, one job, DE31, was in p
> What is the purpose of a chart of accounts?
> Are the following accounts permanent or temporary accounts? a. Fees Income b. Johnny Jones, Drawing c. Accounts Payable d. Accounts Receivable e. Johnny Jones, Capital f. Prepaid Rent g. Cash h. Advertising Expense i. Utilities Expense j. Equipment k. Sa
> Why is the modern system of accounting usually called the double-entry system?
> What are accounts?
> What are expenses?
> What is revenue?
> Why does the third line of the headings differ on the balance sheet and the income statement?
> What information is shown in the heading of a financial statement?
> What information does the statement of owner’s equity contain?
> What information does the income statement contain?
> Certain information about the statement of cost of goods manufactured and the income statement for the year ended December 31, 20X1, for Paul’s Production, Inc., is given below: Beginning inventory of finished goods, 105 percent of ending inventory Work
> What information does the balance sheet contain?
> What are assets, liabilities, and owner’s equity?
> Describe the effects of each of the following business transactions on assets, liabilities, and owner’s equity. a. Bought equipment on credit. b. Paid salaries to employees. c. Sold services for cash. d. Paid cash to a creditor. e. Bought furniture for c
> How does net income affect owner’s equity?
> How is net income or net loss determined?
> What is the fundamental accounting equation?
> Employees sometimes make mistakes and errors in recording accounting transactions. Is this considered fraud?
> Name two common internal control and fraud prevention procedures. Answer: Two common internal control and fraud prevention procedures are policies and procedures that require written proof that transactions and payments are authorized and separating du
> What is the goal of internal control?
> Define fraud.
> In January 20X1, Kate Kasal started Warmers, a business manufacturing ladies’ scarves. Kasal was so busy with the manufacturing side of the business that she did not take time to set up detailed accounting records; the business checkbook was her only rec
> Define internal control.
> What is a limited liability company (LLC)?
> How does one become a Certified Bookkeeper (CB)?
> What does the Certified Bookkeeper (CB) designation imply?
> What is the purpose of the Public Company Accounting Oversight Board?
> Explain opportunity costs.
> What is a differential cost?
> What are sunk costs?
> Explain the meaning of marginal income on sales.
> What is the manufacturing margin?
> At the last staff meeting of the Beach Shop, the question of how expenses are allocated to each department was raised. Because year-end bonuses are awarded to the managers on the basis of departmental net income from operations, the discussion was lively
> Is absorption costing or direct costing more useful in making decisions? Why?
> What is the fundamental difference between direct costing and absorption costing?
> Briefly describe absorption costing.
> Why do the analyses presented in this chapter focus on future costs rather than on past costs? Explain.
> Why might employee morale be a factor in deciding whether to replace existing equipment with new equipment?
> Why might management be reluctant to accept a special order for its products at less than the normal price even though such an order would be legal and profitable?
> Suppose that a company is considering the purchase of new equipment. The old equipment will be sold when the new equipment is acquired. How should the proceeds from the sale of the old equipment be considered in the analysis of the effects of the purchas
> Suggest some non-measurable data that might be considered in deciding to replace existing equipment with new equipment.
> Which of the following items are subtracted from net sales to arrive at contribution margin? a. fixed administrative expenses b. variable administrative expenses c. fixed manufacturing costs d. variable cost of goods sold e. fixed selling expenses f. var
> What is the advantage of using a flexible budget?
> Home Gifts has three sales departments: dishes, clothing, and paper products. The store’s condensed income statement for the year ended December 31, 20X1, is shown below: The proprietor asked the auditor if the Clothing and/or Paper Products departments
> What is a flexible budget?
> What is included in a budget performance report?
> What is a budget?
> What is the relevant range of activity as used in budgeting?
> Briefly explain the high-low point method for analyzing semivariable costs.
> Explain how variable costs per unit change as the level of activity changes.
> What are semivariable costs?
> What are the possible causes of overhead variances?
> What are the possible causes of labor variances?
> What two variances make up the total labor variance?
> Knotting Company was formed and began business on January 1, 2022, when J. T. Wood transferred merchandise inventory with a value of $60,000, cash of $55,000, accounts receivable of $60,000, and accounts payable of $35,000. Common stock with a par value
> Who provides information about wage rates in setting labor standards?
> What are the possible causes of unfavorable materials variances?
> Which manager would more likely be responsible for materials quantity variances?
> What does the price variance for materials show?
> Explain how to compute the quantity variance for materials.
> How are standards set for materials?
> What are standard costs?
