Accounting 101 problems

CLASS 3 ASSIGNED PROBLEMS Exercise #15, p. 162: Acquisition Cost of PP&E Assets (LO 6.1) Li Enterprises recently purchased new computer equipment for its company headquarters. Following is information regarding the various cash expenditures related to the acquisition of this equipment. The invoice price of the equipment was $300,000; however, Li's owner negotiated a 15 percent price reduction. The equipment was shipped to Li's headquarters FOB shipping point. The delivery cost was $2,750. Li paid $1,870 to hire a computer consultant to install and test the new equipment. Supplies costing $135 were used in installing and testing the equipment. The day following the installation of the equipment, one of Li's employees broke a USB port on the computer equipment. The company paid $265 to have the port replaced. Required: (a) Determine the acquisition cost of the computer equipment for accounting purposes. (b) Prepare an appropriate journal entry to record the acquisition of the computer equipment and the incurrence of the related costs. (c) A computer purchased for several thousand dollars may have little resale value one year later because of technological changes in the computer industry. Given that the resale value of computers and computer equipment can decline rapidly, is historical cost the proper valuation basis to use for such assets? Defend your answer. Case #32, p. 167 Choosing a Depreciation Method (LO 6.2) Colorado Climber, which manufactures stairway railings, purchased a $15,000 lathe on January 2, 2009. The lathe was estimated to have a salvage value of $1,000 at the end of its ve-year useful life. The company's owner is trying to decide on a depreciation method to use for this new asset. Required: (a) Compute depreciation expense on the new lathe for 2009 and 2010 assuming that Colorado Climber uses the: (1) Straight-line method (2) Double-declining-balance method (b) Suppose that the company decides to apply the units-of-production depreciation method to the new lathe. The lathe will be used to produce approximately 3,500 units of product over its useful life. Compute the depreciation expense on the lathe for 2009 and 2010 if 550 and 670 units of product are made, respectively, in 2009 and 2010. (c) Which of the three major depreciation methods best satises the matching principle? Defend your choice. (d) Under which of the three depreciation methods will Colorado Climber have the highest net income for 2009? For 2010? Show your calculations. (e) If Colorado Climber wants to minimize its tax liability, which depreciation method should the company use for 2009 and 2010? Explain your answer. (f) Why do you think the government allows a company to use different depreciation methods for accounting and tax purposes? Do you think that using different methods for accounting and tax purposes is ethical? Explain your answer. Exercise #21, p. 196:Recording Warranty Expense (LO 7.1) Vacuum cleaners sold by Orackle carry a one-year warranty on parts and labor. However, the company expects very few warranty claims. Last year, the company sold 500 vacuum cleaners and made warranty repairs on ten vacuums at a total cost of approximately $300. Required: (a) If Orackle does not record a product warranty liability at the end of each scal year, how will the business's nancial statements be affected? What accounting concepts or principles will be violated? (b) Under what condition or conditions could Orackle reasonably argue that no product warranty liability needs to be recorded at year-end? (c) Would the argument you made in part (b) be appropriate for General Motors? Why or why not? Exercise #26, p. 197: Lease vs. Purchase (LO 7.4) You are considering buying an automobile for $20,000, and you have a $2,000 down payment. The sales tax rate is 7 percent, and the interest rate to borrow the remaining funds for ve years is 6 percent. Other fees involved in the purchase are $200. The market rate for current investments is 4 percent. The automobile is expected to be worth $5,000 at the end of the ve years, with an annual rate of fair market value reduction of 15 percent. You also have the option of leasing the same vehicle for three years at an 8 percent interest rate. The dealer requires a security deposit of $500, and other front-end fees total $750. At the end of the lease term, the vehicle is expected to have a fair market value of $12,000. Required: Go to http://www.lendingtree.com/partners/autotrader/AutoLeaseBuyCalc.asp and determine the net costs of buying and leasing. Are there any other items that you would want to consider in choosing the buy or lease alternative? Case #45, p. 203: Analyzing Carnival's Liabilities (LO 7.7, Internet) Use the annual report of Carnival Corporation for the 2007 scal year to answer the following questions. This information can be found on either the annual report or the SEC 10-K ling at www.carnival.com by following the links to Investor Relations. Required: (a) Calculate the following ratios and measurements for Carnival for the years 2006 and 2007. Comment on changes from year to year and what each ratio means for Carnival. (1) Current ratio (2) Working capital (3) Debt to total assets (4) Long-term debt to equity (5) Times interest earned (b) Does Carnival have any contingent liabilities? If so, how does the company handle the accounting of such liabilities? Where did you nd this information? (c) What kind of retirement plan does Carnival have for its employees? (d) What portion of Carnival's long-term debt is due in the next scal year? (e) Does Carnival lease any assets? If so, how does the company account for such leases? (f) Is Carnival currently nancing its operations through the use of bonds? If so, to what extent? If not, what other methods might the company use to nance operations