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Questions and Answers of Accounting

Del Conte Construction Company has experienced generally steady growth since its inception in 1953. Management is proud of its record of having maintained or increased its earnings per share in each
“I thought I understood earnings per share,” lamented Brad Dawson, “but you're telling me we need to pretend our convertible bonds have been converted! Or maybe not?”Dawson, your boss, is the
The Alberto-Culver Company develops, manufactures, distributes, and markets branded beauty care products as well as branded food and household products in the United States and more than 100 other
IGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution and sale of a variety of food products. Industry averages are derived from Troy's
Many sites on the Internet allow the retrieval of current stock price information. Among those sites are Marketwatch (cbs.marketwatch.com) and Quicken (www.quicken.com).Required:1. Access any site on
While eating his Kellogg's Frosted Flakes one January morning, Tony noticed the following article in his local paper:Kellogg Announces Strong 2008 PerformanceAs a shareholder, Tony is well aware that
“Now what do I do?” moaned your colleague, Matt. “This is a first for me,” he confided. You and Matt are recent hires in the Accounting Division of National Paper. A top executive in the
British Airways, Plc. (BA), a U.K. company, prepares its financial statements according to International Financial Reporting Standards. BA's annual report for the year ended March 31, 2009, which
For accounting purposes, we classify accounting changes into three categories. What are they? Provide a short description of each.
There are two basic accounting approaches to reporting accounting changes. What are they?
We report most changes in accounting principle retrospectively. Describe this general way of recording and reporting changes in accounting principle.
Lynch Corporation changes from the sum-of-the-years'-digits method of depreciation for existing assets to the straight-line method. How should the change be reported? Explain.
Sugarbaker Designs, Inc., changed from the FIFO inventory costing method to the average cost method during 2011. Which items from the 2010 financial statements should be restated on the basis of the
Most accounting principles are recorded and reported retrospectively. In a few situations, though, the changes should be reported prospectively. When is prospective application appropriate? Provide
Southeast Steel, Inc., changed from the FIFO inventory costing method to the LIFO method during 2010. How would this change likely be reported in the 2011 comparative financial statements?
Direct Assurance Company revised the estimates of the useful life of a trademark it had acquired three years earlier. How should Direct account for the change?
For financial reporting, a reporting entity can be a single company, or it can be a group of companies that reports a single set of financial statements. When changes occur that cause the financial
The issuance of FASB guidance regarding consolidation of all majority-owned subsidiaries required Ford Motors to include a previously unconsolidated finance subsidiary as part of the reporting
Describe the process of correcting an error when it's discovered in a subsequent reporting period.
If merchandise inventory is understated at the end of 2010, and the error is not discovered, how will net income be affected in 2011?
If it is discovered that an extraordinary repair in the previous year was incorrectly debited to repair expense, how will retained earnings be reported in the current year's statement of
What action is required when it is discovered that a five-year insurance premium payment of $50,000 two years ago was debited to insurance expense? (Ignore taxes.)
Suppose the error described in the previous question is not discovered until six years later. What action will the discovery of this error require?
With regard to the correction of accounting errors, what is the difference between U.S. GAAP and IFRS?
In 2011, the Carney Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2010, Carney's inventories were $32 million (FIFO). Carney's
In 2011, DeWash Industries changed its method of valuing inventory from the average cost method to the FIFO method. At December 31, 2010, DeWash's inventories were $47.6 million (average cost).
In 2011, Dorsey Markets changed its method of valuing inventory from the FIFO method to the LIFO method. At December 31, 2010, Dorsey's inventories were $96 million (FIFO). Dorsey's records were
Irwin, Inc. constructed a machine at a total cost of $35 million. Construction was completed at the end of 2007 and the machine was placed in service at the beginning of 2008. The machine was being
Refer to the situation described in BE 20-4. Suppose Irwin has been using the straight-line method and switches to the sum-of-the-years'-digits method. Ignoring income taxes, what journal
Three programmers at Feenix Computer Storage, Inc., write an operating systems control manual for Hill-McGraw Publishing, Inc., for which Feenix receives royalties equal to 12% of net sales.
In 2010, Quapau Products introduced a new line of hot water heaters that carry a one-year warranty against manufacturer's defects. Based on industry experience, warranty costs were expected to
Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $18 million cost of the patent on a straight-line basis since it was acquired at the
When DeSoto Water Works purchased a machine at the end of 2010 at a cost of $65,000, the company debited Buildings and credited Cash $65,000. The error was discovered in 2011. What journal entry will
In 2011, internal auditors discovered that PKE Displays, Inc. had debited an expense account for the $350,000 cost of a machine purchased on January 1, 2008. The machine's useful life was expected to
In 2011, the internal auditors of Development Technologies, Inc. discovered that(a) 2010 accrued wages of $2 million were not recognized until they were paid in 2011 and(b) A $3 million purchase of
During 2009 (its first year of operations) and 2010, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2011, Batali decided to
Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2011. The inventory as reported at the end of 2010 using LIFO would
In keeping with a modernization of corporate statutes in its home state, UMC Corporation decided in 2011 to discontinue accounting for reacquired shares as treasury stock. Instead, shares repurchased
The Trump Companies, Inc. has ownership interests in several public companies. At the beginning of 2011, the company's ownership interest in the common stock of Milken Properties increased to the
Companies often invest in the common stock of other corporations. The way we report these investments depends on the nature of the investment and the investor's motivation for the investment. The
Access the FASB's Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items:1. Reporting most changes in
The Long Island Construction Company has used the completed contract method of accounting for construction contracts. At the beginning of 2011, the company decides to change to the
Moulton Foods has always used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2011, Moulton decided to change to the LIFO method. As a result of
Wolfgang Kitchens has always used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2011, Wolfgang decided to change to the LIFO method. Net income
For financial reporting, Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment acquired at the beginning of 2008 for $2,560,000. Its useful life was
The Canliss Milling Company purchased machinery on January 2, 2009, for $800,000. A five-year life was estimated and no residual value was anticipated. Canliss decided to use the straight-line
Dreighton Engineering Group receives royalties on a technical manual written by two of its engineers and sold to William B. Irving Publishing, Inc. Royalties are 10% of net sales, receivable on
The Commonwealth of Virginia filed suit in October 2009, against Northern Timber Corporation seeking civil penalties and injunctive relief for violations of environmental laws regulating forest
Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer's defects. Because this was the first product for which the company
Bronson Industries reported a deferred tax liability of $8 million for the year ended December 31, 2010, related to a temporary difference of $20 million. The tax rate was 40%. The temporary
The Peridot Company purchased machinery on January 2, 2009, for $800,000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation
Wardell Company purchased a mini computer on January 1, 2009, at a cost of $40,000. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an
Indicate with the appropriate letter the nature of each situation described below:Type of ChangePR Change in principle reported retrospectivelyPP Change in principle reported prospectivelyE Change in
During 2011, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts:WMC uses the periodic inventory system and the FIFO
On December 12, 2011, an investment costing $80,000 was sold for $100,000. The total of the sale proceeds was credited to the investment account.Required:1. Prepare the journal entry to correct the
Wilkins Food Products, Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins
At the end of 2010, Majors Furniture Company failed to accrue $61,000 of interest expense that accrued during the last five months of 2010 on bonds payable. The bonds mature in 2024. The discount on
Below are three independent and unrelated errors.a. On December 31, 2010, Wolfe-Bache Corporation failed to accrue office supplies expense of $1,800. In January 2011, when it received the bill from
For each of the following inventory errors occurring in 2011, determine the effect of the error on 2011's cost of goods sold, net income, and retained earnings. Assume that the error is not
Indicate with the appropriate letter the nature of each adjustment described below:Type of AdjustmentA. Change in accounting principle (reported retrospectively)B. Change in accounting principle
1. Kap Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2011. The change affects machinery purchased at the beginning of 2009 at a cost of
The following questions dealing with accounting changes and errors are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation
The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to the FIFO cost method at the beginning of 2011. At December 31, 2010, inventories were $120,000
The Pyramid Construction Company has used the completed-contract method of accounting for construction contracts during its first two years of operation, 2009 and 2010. At the beginning of 2011,
Shown below are net income amounts as they would be determined by Weihrich Steel Company by each of three different inventory costing methods ($ in 000s).Required:1. Assume that Weihrich used FIFO
The Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1974. In 2011, the company decided to change to the average cost method.
Fantasy Fashions had used the LIFO method of costing inventories, but at the beginning of 2011 decided to change to the FIFO method. The inventory as reported at the end of 2010 using LIFO would have
During 2009 and 2010, Faulkner Manufacturing used the sum-of-the-years'-digits (SYD) method of depreciation for its depreciable assets, for both financial reporting and tax purposes. At the beginning
In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000. Additional costs of $600,000 were incurred to develop the mine. Geologists estimated that 400,000 tons of ore
Described below are six independent and unrelated situations involving accounting changes. Each change occurs during 2011 before any adjusting entries or closing entries were prepared. Assume the tax
On a sheet of paper numbered from 1 to 10, indicate for each item below the type of change and the reporting approach Wagner would use.Change:1. By acquiring additional stock, Wagner increased its
You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2011, you discover the following errors related to the 2009 and 2010 financial statements:a.
The Collins Corporation purchased office equipment at the beginning of 2009 and capitalized a cost of $2,000,000. This cost included the following expenditures:The company estimated an eight-year
Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 1999 by two talented engineers with little business training. In 2011, the company was acquired by one of
Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 1999 by two talented engineers with little business training. In 2011, the company was acquired by one of
Whaley Distributors is a wholesale distributor of electronic components. Financial statements for the years ended December 31, 2009 and 2010, reported the following amounts and subtotals ($ in
Conrad Playground Supply underwent a restructuring in 2011. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2011 before
You are internal auditor for Shannon Supplies, Inc., and are reviewing the company's preliminary financial statements. The statements, prepared after making the adjusting entries, but before closing
George Young Industries (GYI) acquired industrial robots at the beginning of 2008 and added them to the company's assembly process. During 2011, management became aware that the $1 million cost of
Webster Products, Inc., adopted the dollar-value LIFO method of determining inventory costs for financial and income tax reporting on January 1, 2011. Webster continues to use the FIFO method for
On November 8, 2007, AMCON Distributing Company (“AMCON” or “Company”) issued a press release announcing its financial results for the fiscal year ended September 30, 2007. Included was the
Mayfair Department Stores, Inc., operates over 30 retail stores in the Pacific Northwest. Prior to 2011, the company used the FIFO method to value its inventory. In 2011, Mayfair decided to switch to
Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled
Generally accepted accounting principles should be applied consistently from period to period. However, changes within a company, as well as changes in the external economic environment, may force a
Late in 2011, you and two other officers of Curbo Fabrications Corporation just returned from a meeting with officials of The City of Jackson. The meeting was unexpectedly favorable even though it
Early one Wednesday afternoon, Ken and Larry studied in the dormitory room they shared at Fogelman College. Ken, an accounting major, was advising Larry, a management major, regarding a project for
It's financial statements preparation time at Center Industries where you have been assistant controller for two months. Ben Huddler, the controller, seems to be pleasant but unpredictable. Today,
DRS Corporation changed the way it depreciates its computers from the sum-of-the-year's-digits method to the straight-line method beginning January 1, 2011. DRS also changed its estimated residual
Ray Solutions decided to make the following changes in its accounting policies on January 1, 2011:1. Changed from the cash to the accrual basis of accounting for recognizing revenue on its service
Sometimes a business entity will change its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in
Some inventory errors are said to be “self-correcting” in that the error has the opposite financial statement effect in the period following the error, thereby “correcting” the original
Danville Bottlers is a wholesale beverage company. Danville uses the FIFO inventory method to determine the cost of its ending inventory. ending inventory quantities are determined by a physical
Stock in ABC Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.60 per share, and dividends
Assume New Tech, Inc., is trading at $48 and its November call option is $2.20. If the stock ends up at $60 and the option at $11, what is the leverage factor?
The Lo Tech Co. just issued a dividend of $2.20 per share on its common stock. The company is expected to maintain a constant 6 percent growth rate in its dividends indefinitely.If the stock sells
A company has a retention rate of 50%, sales of $25,000, beginning equity of $50,000 and profit margins of 10%, an asset turnover ratio of .75 and debt of $10,000. What is its sustainable growth
Should a company use debt or equity to finance its operations? Explain. (Capital structure)
As a consultant to Gamma Skiwear, you have been asked to determine the appropriate discount rate to use in the evaluation of several projects. You have determined the firm€™s current
Y Corporation Distributes, as a dividend, a building with a fair market value of $100,000 and an adjusted basis to Y at the time of distribution of $50,000, to X Corporation which is the sole
Using data from our fictitious Company, MT 217 (from Unit 3), We will calculate the expect value of its stock using the Constant Growth Model (page 114): Po = D1/(r - g)To do that we will have to

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