Soon after beginning the year-end audit work on March 10 at Engone Company, the auditor has the following conversation with the controller.
Controller: The year ended March 31st should be our most profitable in history and, as a consequence, the board of directors has just awarded the officers generous bonuses.
Auditor: I thought profits were down this year in the industry, according to your latest interim report. Controller: Well, they were down, but 10 days ago we closed a deal that will give us a substantial increase for the year. Auditor: Oh, what was it?
Controller: Well, you remember a few years ago our former president bought stock in Henderson Enterprises because he had those grandiose ideas about becoming a conglomerate. For 6 years we have not been able to sell this stock, which cost us $3,000,000 and has not paid a nickel in dividends. Thursday we sold this stock to Bimini Inc. for $4,000,000. So, we will have a gain of $700,000 ($1,000,000 pretax) which will increase our net income for the year to $4,000,000, compared with last year’s $3,800,000. As far as I know, we’ll be the only company in the industry to register an increase in net income this year. That should help the market value of the stock! Auditor: Do you expect to receive the $4,000,000 in cash by March 31st, your fiscal year-end?
Controller: No. Although Bimini Inc. is an excellent company, they are a little tight for cash because of their rapid growth. Consequently, they are going to give us a $4,000,000 zero-interest bearing note with payments of $400,000 per year for the next 10 years. The first payment is due on March 31 of next year. Auditor: Why is the note zero-interest-bearing?
Controller: Because that’s what everybody agreed to. Since we don’t have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on the Henderson Enterprises stock.
Instructions
Do you agree with the way the controller has accounted for the transaction? If not, how should the transaction be accounted for?
> The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first-out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following informat
> The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2014. Instructions (a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows
> Presented below is information related to Blowfish radios for the Hootie Company for the month of July. Instructions (a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost f
> Shania Twain Company was formed on December 1, 2013. The following information is available from Twain’s inventory records for Product BAP. A physical inventory on March 31, 2014, shows 1,600 units on hand. Instructions Prepare schedules t
> John Adams Company’s record of transactions for the month of April was as follows. Instructions (a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost. (b)
> Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June. Instructions (a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (
> The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated. Instructions Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory er
> How might a company obtain a price index in order to apply dollar-value LIFO?
> At December 31, 2013, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly. 1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a
> Ann M. Martin Company makes the following errors during the current year. (Evaluate each case independently and assume ending inventory in the following year is correctly stated.) 1. Ending inventory is overstated, but purchases and related accounts p
> Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company. Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account. Instructions (a) Assume Fong Sai-Yuk uses a per
> Cruise Industries purchased $10,800 of merchandise on February 1, 2014, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,500 (gross price before trade or cash discount) on February 4. The invoice was paid on Februa
> Presented below are transactions related to Tom Brokaw, Inc. May 10 Purchased goods billed at $15,000 subject to cash discount terms of 2/10, n/60. 11 Purchased goods billed at $13,200 subject to terms of 1/15, n/30. 19 Paid invoice of May 10. 24 P
> Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.
> Craig Company asks you to review its December 31, 2014, inventory values and prepare the necessary adjustments to the books. The following information is given to you. 1. Craig uses the periodic method of recording inventory. A physical count reveals
> Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, w
> Assume that in an annual audit of Harlowe Inc. at December 31, 2014, you find the following transactions near the closing date. 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the
> In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2014, showed merchandise with a cost of $441,000 was on hand at that date. You also discover the following items were all excluded from the $441,000. 1. Merchandis
> FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determina
> Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet. 1. Goods out on consignment at another company’s store. 2. Goods sold on an installment basis (bad debts can be reas
> Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow. Instructions Compute the value of the 2014 and 2015 inventories using the dollar-value LIFO method.
> Midori Company had ending inventory at end-of-year prices of $100,000 at December 31, 2013; $119,900 at December 31, 2014; and $134,560 at December 31, 2015. The year-end price indexes were 100 at 12/31/13, 110 at 12/31/14, and 116 at 12/31/15. Compute
> Units Unit Cost Total Cost $ 2,500 4,800 4,550 $10 April 1 inventory April 15 purchase April 23 purchase 250 400 12 350 13 1,000 $11,850
> Data for Amsterdam Company are presented in BE8-5. Compute the April 30 inventory and the April cost of goods sold using the FIFO method. In BE8-5
> Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available. Compute the April 30 inventory and the April cost of goods sold using the average-cost method.
> Bienvenu Enterprises reported cost of goods sold for 2014 of $1,400,000 and retained earnings of $5,200,000 at December 31, 2014. Bienvenu later discovered that its ending inventories at December 31, 2013 and 2014, were overstated by $110,000 and $35,0
> Stallman Company took a physical inventory on December 31 and determined that goods costing $200,000 were on hand. Not included in the physical count were $25,000 of goods purchased from Pelzer Corporation, f.o.b. shipping point, and $22,000 of goods s
> Matlock Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost $34 each. During June, the company purchased 150 units at $34 each, returned 6 units for credit, and sold 125 units at $50 each. Journalize the Ju
> Included in the December 31 trial balance of Rivera Company are the following assets. Prepare the current assets section of the December 31 balance sheet.
> Specific identification is sometimes said to be the ideal method of assigning cost to inventory and to cost of goods sold. Briefly indicate the arguments for and against this method of inventory valuation.
> On July 1, 2014, Brigham Corporation purchased Young Company by paying $250,000 cash and issuing a $100,000 note payable to Steve Young. At July 1, 2014, the balance sheet of Young Company was as follows. The recorded amounts all approximate curre
> Part 1: On July 1, 2014, Wallace Company, a calendar-year company, sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Wallace Company will receive interest at the prevailing rate for a
> On January 1, 2014, Botosan Company issued a $1,200,000, 5-year, zero interest-bearing note to National Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2015 Botosan fell into financial trouble due to increased
> Presented below is information related to Haselhof Inc. Balance per books at October 31, $41,847.85; receipts $173,523.91; disbursements $164,893.54. Balance per bank statement November 30, $56,274.20. The following checks were outstanding at November
> The cash account of Aguilar Co. showed a ledger balance of $3,969.85 on June 30, 2014. The bank statement as of that date showed a balance of $4,150. Upon comparing the statement with the cash records, the following facts were determined. 1. There wer
> Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions. 1. On
> The balance sheet of Starsky Company at December 31, 2013, includes the following. Transactions in 2014 include the following. 1. Accounts receivable of $138,000 was collected including accounts of $60,000 on which 2% sales discounts were allowed
> On July 1, 2014, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and
> On September 30, 2013, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s n
> Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note&rs
> Clark Pierce conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of $250,000. Its annual bad debt rate has been approximately 1½% of sales. In recent discussions wit
> Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and Allowance for Doubtful Accounts had a credit balance of $40,000.
> Francis Equipment Co. closes its books regularly on December 31, but at the end of 2014 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of Ja
> On December 31, 2014, Conchita Martinez Company signed a $1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, becau
> On December 31, 2014, Iva Majoli Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2016, Majoli began to experience financial difficulty. As
> Braddock Inc. had the following long-term receivable account balances at December 31, 2013. Transactions during 2014 and other information relating to Braddock’s long-term receivables were as follows. 1. The $1,500,000 note receivable is
> Logan Bruno Company has just received the August 31, 2014, bank statement, which is summarized below. The general ledger Cash account contained the following entries for the month of August. Deposits in transit at August 31 are $3,800, and ch
> Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records. Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to co
> The petty cash fund of Fonzarelli’s Auto Repair Service, a sole proprietorship, contains the following. The general ledger account Petty Cash has a balance of $300. Instructions Prepare the journal entry to record the reimbursement of the
> Carolyn Keene, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April. 1. On April 1, it established a petty cash fund in the amount o
> Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers. On August 1, 2014, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge.
> Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling $25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5%
> Presented below is information for Jones Company. 1. Beginning-of-the-year Accounts Receivable balance was $15,000. 2. Net sales (all on account) for the year were $100,000. Jones does not offer cash discounts. 3. Collections on accounts receivable
> On December 31, 2012, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2014, as payment in full. Hayduke is somewha
> On July 1, 2014, Agincourt Inc. made two sales. 1. It sold land having a fair value of $700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,101,460. The land is carried on Agincourt’s books at a cost o
> JFK Corp. factors $300,000 of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2014. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charg
> Beyoncé Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financi
> On December 31, 2014, Oakbrook Inc. rendered services to Beghun Corporation at an agreed price of $102,049, accepting $40,000 down and agreeing to accept the balance in four equal installments of $20,000 receivable each December 31. An assumed interest
> Ames Quartet Inc. factors receivables with a carrying amount of $200,000 to Joffrey Company for $160,000 on a with recourse basis. Instructions The recourse provision has a fair value of $1,000. This transaction should be recorded as a sale. Prepare
> The trial balance before adjustment for Phil Collins Company shows the following balances. Instructions Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.) 1. To obtain
> On April 1, 2014, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2014. The assignment agreement calls for Rasheed Company to continue to collect the receivables. Thir
> Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that w
> Presented below is information related to James Garfield Corp. July 1 James Garfield Corp. sold to Warren Harding Co. merchandise having a sales price of $8,000 with terms 2/10, net/60. Garfield records its sales and receivables net. 5 Accounts recei
> Danica Patrick, Inc. includes the following account among its trade receivables. Instructions Age the balance and specify any items that apparently require particular attention at year-end.
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marks-and-Spencer-Annual-report-and-financial-statements-20
> As the new staff person in your company’s treasury department, you have been asked to conduct research related to a proposed transfer of receivables. Your supervisor wants the authoritative sources for the following items that are discussed in th
> On December 31, 2014, Firth Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-rate note. The note was issued to yield 10% interest. Unfortunately, during 2016, Firth began to experience financial difficulty. As a result
> What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?
> Briefly describe the impairment evaluation process and assessment of receivables on an individual or collective basis.
> On October 1, 2014, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). T
> Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 2% of net credit sales. Given the recession and the high interest rate environment, the president, nervous that
> Salen Company finances some of its current operations by assigning accounts receivable to a finance company. On July 1, 2014, it assigned, under guarantee, specific accounts amounting to $150,000. The finance company advanced to Salen 80% of the accoun
> Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable $789,000. This balance consists of the following items: Illustrate how these items should be shown in the balance sheet as of December 31. &n
> What is the theoretical justification of the allowance method is as contrasted with the direct write-off method of accounting for bad debts?
> What are the basic problems that occur in the valuation of accounts receivable?
> The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year. Dickinson Corporation follows the policy of debiting Bad Debt Expense as accounts are written off. The chie
> What are two methods of recording accounts receivable transactions when a cash discount situation is involved? Which is more theoretically correct? Which is used in practice more of the time? Why?
> The trial balance before adjustment of Reba McIntyre Inc. shows the following balances. Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts
> At the end of 2014, Aramis Company has accounts receivable of $800,000 and an allowance for doubtful accounts of $40,000. On January 16, 2015, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and manag
> Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co. In BE7-2 On June 1, 2014, it made sales of $50,000 with terms 3/15, n/45. On June 12, 2014, Res
> On January 1, 2014, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargent’s zero-interest-bearing note for $1,000,000 payable in 5 years. What entry would Lombard make to record the sale, assumi
> On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for th
> Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of $1,500 per month, has just purchased a new Acura. You decided to test the accuracy of the accounts receivable balance of $82,000 as shown in the ledger. The following information
> Jim Carrie Company shows a balance of $181,140 in the Accounts Receivable account on December 31, 2013. The balance consists of the following. Instructions Illustrate how the information above should be shown on the balance sheet of Jim Carrie Co
> Presented below are a number of independent situations. 1. Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180. 2. Checking account balance $600,000; a
> The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2014, balance sheet. The following information is provided. 1. Commercial savings account of $600,000 and a commercial checking acco
> Dold Acrobats lent $16,529 to Donaldson, Inc., accepting Donaldson’s 2-year, $20,000, zero-interestbearing note. The implied interest rate is 10%. Prepare Dold’s journal entries for the initial transaction, recognition of interest each year
> Define a “compensating balance.” How should a compensating balance be reported?
> Milner Family Importers sold goods to Tung Decorators for $30,000 on November 1, 2014, accepting Tung’s $30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of
> Duncan Company reports the following financial information before adjustments. Instructions Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivabl
> Use the information presented in BE7-4 for Wilton, Inc. In BE7-4 Wilton, Inc. had net sales in 2014 of $1,400,000. At December 31, 2014, before adjusting entries, the balances in selected accounts were: Accounts Receivable $250,000 debit, and Allowan
> Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company du
> Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon
> When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
> Indicate three reasons why a company might sell its receivables to another company.
> Wilton, Inc. had net sales in 2014 of $1,400,000. At December 31, 2014, before adjusting entries, the balances in selected accounts were: Accounts Receivable $250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 2%
> What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?
> What is “imputed interest”? In what situations is it necessary to impute an interest rate for notes receivable? What are the considerations in imputing an appropriate interest rate?
> Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
> Indicate how well the percentage-of-sales method and the aging method accomplish the objectives of the allowance method of accounting for bad debts.
