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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Accountants in other countries sometimes write up the recorded amounts of long-term assets when their values increase. Why are U.S. accountants reluctant to increase the recorded value of property,
Chong Lai Company acquired a new machine in order to expand its productive capacity. The costs associated with the machine purchase were as follows: RUnchaSselpnice matte ater $10,000 Installation
Antique Furniture Company decided to purchase a new furniture-polishing machine for its store in New York City. After a long search, it found the appropriate polisher in Chicago. The machine costs
Western Oil Company, which prepares financial statements on a calendar-year basis, purchased new drilling equipment on July 1, 2003, using check numbers 1015 and 1016. The check totals are shown
On January 1, 2003, Hartmeyer Company leased a fax machine with a laser printer from Teleproducts, Inc. The five-year lease is noncancelable and requires monthly payments of $150 at the end of each
Litton Company is constructing a new office building. Costs of the building are as follows: Wages paid to construction NOL KG TSS ecRe ain cue circ tice elsieiiel: rar tre neritic eon a $185,000
Luric Company purchased a new car on July 1, 2002, for $15,000. The estimated life of the car was four years or 104,000 miles, and its salvage value was estimated to be $2,000. The car was driven
Prepare entries in the books of Sanmara, Inc., to reflect the following. (Assume cash transactions.) 1. Purchased a lathing machine to be used by the firm in its production process. Invoice
Consider the following three independent scenarios: SSNS 1 2 3 Originalicostsoftassctuaeee eee $1,400 $1,400 $1,400 Accumulated depreciation............ 400 400 400 _ Sum of future cash flows
In 1998, Rhode Company purchased land and a building at a cost of $800,000, of which $200,000 was allocated to the land and $600,000 was allocated to the building. As of December 31, 2002, the
Honey Bee Company purchased a machine for $91,000. The machine has an estimated useful life of seven years and a salvage value of $7,000. Journalize the disposal of the machine under each of the
Gaylord Research, Inc., has the following intangible assets: Expected Useful Asset Cost Date Purchased or Legal Life Goodwill eee ree de cn eee $ 16,000 January 1, 1994 20 years Patents sorties ci
On January 1, 2002, Landon Company purchased a franchise to operate a regionally owned fast-food restaurant for a cost of $250,000. On July 1, 2002, Landon Company purchased another existing business
Stringtown Company purchased Stansbury Island Manufacturing for $1,800,000 cash. The book value and fair value of the assets of Stansbury Island as of the date of the acquisition are listed below:
Handy Corner Stores reported the following asset values in 2002 and 2003: a SSS 2003 2002 Casi SRP isnt neces east rere erty ae Seen en ee Peer ai Pe ment Ll $ 30,000 $ 20,000 ACCOUNTS TeCelVabl ema
Montana Oil Company, which prepares financial statements on a calendar-year basis, pur- chased new drilling equipment on July 1, 2003. A breakdown of the cost follows: Costiofidrillingiequipmentmiya)
At the beginning of 2003, Lowham’s Guest Ranch constructed a new walk-in freezer that had a useful life of 10 years. At the end of 10 years, the motor could be salvaged for $2,000. In addition to
Techno Company purchases a $400,000 piece of equipment on January 2, 2001, for use in its manufacturing process. The equipment’s estimated useful life is 10 years with no salvage value. Techno uses
The University of Northern Utah purchased a new van on January 1, 2002, for $30,000. The estimated life of the van was five years or 95,000 miles, and its salvage value was estimated to be $2,000.
On January 1, 2002, MAC Corporation purchased a machine for $60,000. The machine cost $800 to deliver and $2,000 to install. At the end of 10 years, MAC expects to sell the machine for $2,000.
On January 1, 2002, Castle Investment Corporation purchased a coal mine for cash, having taken into consideration the favorable tax consequences and the inevitable energy crunch in the future. Castle
On January 1, 2001, Landon Excavation Company purchased a new bulldozer for $120,000. The equipment had an estimated useful life of 10 years and an estimated residual value of $10,000. On January 1,
Pacific Printing Company purchased a new printing press. The invoice price was $158,500. The company paid for the press within 30 days, so it was allowed a 3% discount. The freight cost for
On January 2, 2003, Cameron Company contracted to lease a computer on a noncancelable basis for five years at an annual rental of $63,000, payable at the end of each year. The computer has an
The board of directors of Swogen Company authorized the president to lease a corporate jet to facilitate her travels to domestic and international subsidiaries of the company. After extensive
Jennifer Cosmetics wants to construct a new building. It has three building options, as follows:a. Hire a contractor to do all the work. Jennifer has a bid of $850,000 from a reputable contractor to
On January 1, VICOM Company purchased a $68,000 machine. The estimated life of the machine was five years, and the estimated salvage value was $5,000. The machine had an estimated useful life in
On April 1, 2003, Mission Company paid $360,000 in cash to purchase land, a building, and equipment. The appraised fair market values of the assets were as follows: land, $90,000; building, $260,000;
On April 1, 2003, Rosenberg Company purchased for $200,000 a tract of land on which was located a fully equipped factory. The following information was compiled regarding this purchase: Market
On January 2, 2001, Union Oil Company purchased a new airplane. The following costs are related to the purchase: Airplane, base price Cash discount Sales tax Delivery charges $112,000 3,000 4,000
On July 1, 2003, Philip Ward bought a used pickup truck at a cost of $5,300 for use in his business. On the same day, Ward had the truck painted blue and white (his company’s colors) at a cost of
On April 30, 2001, Lindon Oil Company purchased an oil well, with estimated reserves of 100,000 barrels of oil, for $1 million cash. Prepare journal entries for the following: 1. Record the purchase
Delta Company owns plant and equipment on the island of Lagos. The cost and book value of the building are $2,800,000 and $2,400,000, respectively. Until this year, the market value of the factory
On January 1, 2003, Universal Company purchased the following assets and liabilities from Grand Company for $250,000: Book Fair Market Value Value UIVONLONY nae en eae ER: eres eine eRe Ree ee naee
On January 1, 2003, Fishing Creek Company purchased Skull Valley Technologies for $8,800,000 cash. The book value and fair value of Skull Valley’s assets as of the date of the acquisition are
Waystation Company reported the following asset values in 2002 and 2003: SSSS a 2003 2002 CASI Nis cosvesgsen < vap bocce esheets a age SERENE Os tte te $ 40,000 $ 30,000 Accounistreceivabbl@war -§
Springs Hardware Company has a giant paint mixer that cost $31,500 plus $400 to install. The estimated salvage value of the paint mixer at the end of its useful life in 15 years is estimated to be
On January 1, Top Flight Company purchased a $68,000 machine. The estimated life of the machine was five years, and the estimated salvage value was $5,000. The machine had an estimated useful life in
On July 1, 2002, the consulting firm of Little, Smart, and Quick bought a new computer for $120,000 to help it service its clients more efficiently. The new computer was estimated to have a useful
Curtis, Inc., a firm that makes oversized boots, purchased a machine for its factory. The following data relate to the machine: PICO pacas ten pring a eee em - $16,000 Delivery charges............
Ironic Metal Products, Inc., acquired a machine on January 2, 2001, for $76,600. The useful life of the machine was estimated to be eight years with a salvage value of $4,600. Depreciation is
Forest Products, Inc., buys and develops natural resources for profit. Since 2000, it has had the following activities:1/1/00 Purchased for $800,000 a tract of timber estimated to contain 1,600,000
Smithfield Corportation owns and operates three sawmills that make lumber for building homes. The operations consist of cutting logs in the forest, hauling them to the various sawmills, sawing the
What is the primary difference between the intrinsic value method and the fair value method of accounting for stock-based compensation plans? Which method does the FASB recommend?
What additional disclosure is required of companies that use the intrinsic value method?
Severance benefits resulting from a company restructuring are reported as an expense in the period that the re- structuring decision is made rather than when the benefits are actually paid. Why?
Currently MICROSOFT spends a tremendous amount of money on research and development costs to contin- uously develop new products. How are such R&D costs accounted for?
Stockbridge Stores, Inc., has three employees, Frank Wall, Mary Jones, and Susan Wright. Summaries of their 2003 salaries and withholdings are as follows: Federal State FICA Gross Income Taxes Income
Pete Mehling is the president of Mehling Company, and his cousin, John Mehling, is the vice president. Their compensation package includes bonuses of 3% for Pete Mehling and 2% for John Mehling of
On January 1, 2003, the Magily Company established a stock option plan for its senior em- ployees. A total of 60,000 options were granted that permit employees to purchase 60,000 shares of stock at
Refer to the information in Exercise 8-3. Magily’s income for 2003, before subtracting any compensation expense associated with the stock option plan, is $500,000. Prepare the required supplemental
Pension plan information for Rabona Company is as follows: December 31, 2003 Eenstonvobligationtliability 7 21. ee. sont tae ere ee ne) Pe cre ee $3,000,000 December 31, 2003 rel aSeln ail ake
Lorien Company reports the following pension information for 2003: Pension-related interest cost for the year .......... $ 80,000 Pension fund assets, end of year ................4 925,000 Pension
The following pension information is for three different companies. For each company, compute the missing amount or amounts. ES ee SSS Company 1 Company 2 Company 3 PensionmUncdvasSetsmy.semteiaene
In July 2003, Reynolds Company received a bill from the county government for property taxes on its land and buildings for the period July 1, 2002, through June 30, 2003. The amount of the tax bill
Yosef Company began operating on January 1, 2003. At the end of the first year of operations, Yosef reported $750,000 income before income taxes on its income statement but only $660,000 taxable
Boatogooso Company began operating on January 1, 2003. At the end of the first year of operations, Boatogooso reported $500,000 income before income taxes on its income statement but taxable income
Determining whether an expenditure should be expensed or capitalized is often difficult. Con- sider each of the following independent situations and indicate whether you would recom- mend that the
Willow Company is preparing financial statements for the calendar year 2003. The following totals for each account have been verified as correct: Office'Supplies on Hand’ ............. $ 300
Use the following information to prepare an income statement for Fairchild Corporation for the year ended December 31, 2003. You should show separate classifications for revenues, cost of goods sold,
Orange County Bank has three employees, Albert Myers, Juan Moreno, and Michi Endo. During January 2003, these three employees earned $6,000, $4,200, and $4,000, respectively. The following table
Orson Nutrition pays its salespeople a base salary of $1,000 per month plus a commission. Each salesperson starts with a commission of 1% of total gross sales for the month. The commission is
On January 1, 2003, Tiger Man Company established a stock option plan for its senior em- ployees. A total of 400,000 options were granted that permit employees to purchase 400,000 shares of stock at
The following information is available from Haan Company relating to its defined benefit pension plan: Balances as of January 1, 2003: Rension-obligationsitabilitve. senmt.s cotere cen ome ceetette
Kiev Company reported the following information relating to its pension plan for the years 2001 through 2004: Laer ree rere eee Year-End Year-End Interest Service Return Obligation Plan Assets Cost
Black Kitty Company recorded certain revenues of $10,000 and $20,000 on its books in 2001 and 2002, respectively. However, these revenues were not subject to income taxation until 2003. Company
From the following information, prepare an income statement for Notem, Inc., for the year ended December 31, 2003. (HINT: Net income is $119,100.) Assume that there are 10,000 shares of capital stock
INCOME STATEMENT ANALYSIS The following table represents portions of the income statements of Brinkerhoff Company for the years 2001-2003: 2003 2002 2001 Gross salesmreVeMUCaee biccauss sare oti
Why do most companies tolerate having a small centage of uncollectible accounts receivable?
What is the advantage of having a note receivable over having an account receivable?
Why would someone discount a note receivable?
Why would someone factor an account receivable?
ZZZZ BEST was a Los Angeles—based company specializing in carpet cleaning and insurance restoration. Prior to allegations of fraud and its declaration of bankruptcy in 1988, ZZZZ Best was touted as
HealthCare, Inc.,* operates a number of medical testing facilities around the United States. Drug manufacturers, such as MERCK and BRISTOL-MYERS SQUIBB, contract with HealthCare *The name of the
The president, vice president, and sales manager of Moorer Corporation were discussing the company’s present credit policy. The sales manager suggested that potential sales were being lost to
Lopez Company sold merchandise on account to Atlantic Company for $4,000 on June 3, 2003, with terms 2/10, n/30. On June 7, 2003, Lopez Company received $200 of returned merchandise from Atlantic
The trial balance of Stardust Company at the end of its 2003 fiscal year included the follow- ing account balances: Accounts receivable Allowance for bad debts Account $48,900 2,500 (debit balance)
The following data were associated with the accounts receivable and uncollectible accounts of Hilton, Inc., during 2003:a. The opening credit balance in Allowance for Bad Debts was $900,000 at
Dodge Company had the following information relating to its accounts receivable at December 31, 2002, and for the year ended December 31, 2003: V Accounts racelvablerbalamcerateul2/ Oil) O2 sete
Cicero Company’s accounts receivable reveal the following balances: Age of Accounts Current.. 1-30 days past due. 31-60 days past due 61-90 days past due. Receivable Balance $600,000 320,000 80,000
The following aging of accounts receivable is for Harry Company at the end of its first year i seeeres of business: 1. Compute the appropriate Allowance for Bad Debts as of December 31, 2003: 2.
The vice president for Tres Corporation provides you with the following list of accounts re- ceivable written off in the current year. (These accounts were recognized as bad debt expense at the time
The trial balance of Sporting House, Inc., shows a $100,000 outstanding balance in Accounts Receivable at the end of 2002. During 2003, 75% of the total credit sales of $4,000,000 was collected, and
Keefer Company uses the percentage of sales method for computing bad debt expense. As of January 1, 2003, the balance of Allowance for Bad Debts was $200,000. Write-offs of uncollectible accounts
Assume that Hickory Company has the following data related to its accounts receivable: Net sales. Net receivables: Beginning of year End of year. 2002 2003 $1,425,000 $1,650,000 375,000 420,000
The following accounts receivable information is for Happy Tiny Company: Accounts receivable. 2003 2002 2001 $300,000 $260,000 $220,000 18,000 17,000 16,000 Allowance for bad debts Did the
Prepare a bank reconciliation for Oldroyd Company at January 31, 2003, using the information shown. 1. Cash per the accounting records at January 31 amounted to $72,802; the bank statement on this
The records of Denna Corporation show the following bank statement information for December:a. Bank balance, December 31, 2003, $87,450b. Service charges for December, $50c. Rent collected by bank,
Jensen Company has just received the September 30, 2003, bank statement summarized in the following schedule: Cash on hand (recorded on Jensen’s books but not deposited) on September 1 and
Prepare journal entries for the following transactions for Stansworth Plumbing for 2003: July 1 Installed a sprinkling system for Chuck’s Engineering and billed $12,600 for the job. Sept. 1
Nixon Enterprises is experiencing a temporary shortage of cash. To cover the shortage, the fi- nancial vice president of the company proposed that some of the company’s accounts receiv- able be
Escondido Company frequently sells merchandise on promissory notes. The following transac- tions relate to one such note: Feb. 1 Sold merchandise for $9,000 to Marta Tabor; accepted a 6-month, 11%
Rabona Slice, a U.S. company, sold 100,000 cases of tropical fruit to Ben Thanh Market, a Vietnamese firm, for 2.5 billion Vietnamese dong. The sale was made on November tee 2003, when one U.S.
American, Inc., sells one widget to Japanese Company at an agreed-upon price of 1,000,000 yen. On the day of the sale, one yen is equal to $0.01. American, Inc., maintains its accounting records in
Brad Company sells ships. Each ship sells for over $25 million. Brad never starts building a ship until it receives a specific order from a customer. Brad usually takes about four years to build a
Company R and Company S entered into the following transactions: Company R sold merchandise to Company S for $40,000, terms 2/10, n/30. Prior to payment, Company S returned $3,000 of the merchandise
Boulder View Corporation accounts for uncollectible accounts receivable using the allowance method. As of December 31, 2002, the credit balance in Allowance for Bad Debts was $130,000. During 2003,
Assume that Dome Company had the following balances in its receivable accounts on December 31, 2002: Accounts receivable’ 22.5 os cee et ent eee ee wae in ete ata $400,000 Allowancerfor badidebts
Juniper Company was formed in 1993. Sales have increased on the average of 5% per year during its first ten years of existence, with total sales for 2002 amounting to $400,000. Since incorporation,
During 2003, Wishbone Corporation had a total of $5,000,000 in sales, of which 80% were on credit. At year-end, the Accounts Receivable balance showed a total of $2,300,000, which had been aged as

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