Question
A3-25 Accounting versus Economic Income (LO3.1, LO3.2): Ceti Co. sells environmentally friendly coffee cups through an online store. The company is owned by Ceti Kadi.
A3-25 Accounting versus Economic Income (LO3.1, LO3.2):
Ceti Co. sells environmentally friendly coffee cups through an online store. The company is owned by Ceti Kadi. The following transactions took place over the first two years of operations:
Year | Description |
---|---|
20X1 | Purchased 8,000 units for resale at $9 each |
20X1 | Purchased furniture and equipment using the companys line of credit (Note 1) |
20X1 | Incurred other operating expenses of $24,400 during the year |
20X1 | Sold 6,800 units in cash, with a total cost of $20 per unit |
20X1 | Paid $9,000 toward the companys line of credit (including interest of $1,450) |
20X2 | Purchased 12,500 units for resale at $9 each |
20X2 | Sold 11,600 units in cash with a total cost of $20 per unit |
20X2 | Incurred other operating expenses of $28,400 during the year |
20X2 | Paid $15,000 toward the companys line of credit (including interest of $1,220) |
Furniture and equipment has the following estimated useful lives. Ceti depreciates furniture and equipment using the straight-line method.
| Cost | Useful Life | Fair Value 31 Dec. 20X1 | Fair Value 31 Dec. 20X2 |
---|---|---|---|---|
Equipment | 45,000 | 8 years | 42,000 | 42,500 |
Furniture | 13,000 | 4 years | 7,500 | 6,500 |
Required:
a. Calculate the accounting income for 20X1 and 20X2 (use the FIFO method for accounting for inventory).
b. Calculate the total economic income for 20X1 and 20X2.
c. Calculate the total income under the cash basis of accounting.
A3-9 Asset Disposals (LO3.9, LO3.10, LO3.11):
Golf Inc. is a public company that has been in business since the 1980s. It owns and operates over 40 golf courses across Canada. It also owns and operates pro shops and dining facilities. On 1 November 20X4 GI announced it was going to sell three of its golf courses that were underperforming. They have had declining memberships over the past couple of years. GI is currently looking for a buyer. The asking prices are reasonable, and at the time of listing, the real estate agents expected that the courses will be sold before the spring of next year. On 1 November 20X4, the carrying amount of the land is $50,000 but the fair market value is $750,000. The equipment (that is, golf carts), has a carrying amount of $600,000 ($900,000 cost) and a fair market value of $450,000. There was no change to the estimated fair values on 31 December 20X4. The company accepted an offer on 15 January 20X5. The total proceeds for the sale were $1,075,000. The company has a 31 December year-end.
Required:
How would GI account for the disposal of the three golf courses? Explain the impact on the financial statements.
Prepare the journal entries required on 1 November 20X4, 31 December 20X4, and 15 January 20X5.
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