Chapter 3 Exercise 1 1. Inventory errors and income measurement. The income statements of Keagle Company for 20X3 and 20X4 follow. 20X3 20X4 $100,00 0 $109,00 0 Cost of goods sold 62,00 0 74,00 0 Gross profit $ 38,000 $ 35,000 Expense s 26,000 22,000 Net income $ 12,000 $ 13,000 Sales 2. A recent review of the accounting records discovered that the 20X3 ending inventory had been understated by $4,000. a. Prepare corrected 20X3 and 20X4 income statements. b. What is the effect of the error on ending owner's equity for 20X3 and 20X4? Chapter 3 Problem 2 1. Inventory valuation methods: computations and concepts. Wave Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows: 2. 1/3: 100 boards @ $125 3/17: 50 boards @ $130 5/9: 5/9: 246 boards @ $140 7/3: 400 boards @ $150 10/23: 74 boards @ $160 Wave Riders sold 710 boards at an average price of $250 per board. The company uses a periodic inventory system. Instructions a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods: a. First-in, first-out b. Last-in, first-out c. Weighted average b. Which of the three methods would be chosen if management's goal is to 1. produce an up-to-date inventory valuation on the balance sheet? 2. approximate the physical flow of a sand and gravel dealer? 3. report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices? Chapter 6 Exercise 2 1. Depreciation methods. Betsy Ross Enterprises purchased a delivery van for $30,000 in January 20X7. The van was estimated to have a service life of 5 years and a residual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods: a. Units-of-output, assuming 17,000 miles were driven during 20X8 b. Straight-line c. Double-declining-balance Chapter 6 Exercise 3 1. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $1,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following: a. The machine's book value on December 31, 20X5, assuming use of the straightline depreciation method b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500. c. Accumulated depreciation on December 31, 20X5, assuming use of the doubledeclining-balance depreciation method. Chapter 6 Problem 2 1. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3-20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively. Instructions a. Compute depreciation for 20X3-20X7 by using the following methods: straight line, units of output, and double-declining-balance. b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company's depreciation expense for 20X5. c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use. Ashford University ACC Guidance Report Week Three LISTEN TO AUDIO/VIDEO EXPLAINING THE GUIDANCE REPORT Account to be changed Original Amount Ch 5 Ex 1 Inventory understated Questions 4,000 YOUR ANSWERS BASED UPON COURSE START DATE 20X3 100000 57000 43000 26000 17000 Sales Cost of goods sold Gross profit Expenses Net income 20X4 Sales Cost of goods sold Gross profit Expenses Net income What is the effect of the error on ending owner's equity for 20X3 and 20X4? 109000 79000 30000 22000 8000 Account to be changed Ch 5 Pb 2 Sold Ending Inventory Questions FIFO Sales Purchases Ending inventory Cost of Goods Sold Gross Profit LIFO Sales Purchases Ending inventory Cost of Goods Sold Gross Profit Average Cost Sales Purchases Ending inventory Cost of Goods Sold Gross Profit Which of the three methods would be chosen if management's goal is to: Produce an up-to-date inventory valuation on the balance sheet? Approximate the physical flow of a sand and gravel dealer? Report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices? Original Amount 710 160 YOUR ANSWERS BASED UPON COURSE START DATE Account to be changed Ch 6 Ex 2 Purchase price Questions Original Amount 30000 YOUR ANSWERS BASED UPON COURSE START DATE Units-of-output Straight-line Double-declining-balance Account to be changed Ch 6 Ex 3 Cost Original Amount 1000 Questions YOUR ANSWERS BASED UPON COURSE START DATE The machine's book value on December 31, 20X5, assuming use of the straight-line depreciation method Depreciation expense for 20X4, assuming use of the units-ofoutput depreciation method. Actual washing cycles in 20X4 totaled 500. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method. Account to be changed Original Amount Ch 6 Pb 2 Machine Part C Cost 50000 47800 YOUR ANSWERS BASED UPON COURSE START DATE Questions Straight line 20X3 20X4 20X5 20X6 20X7 Units-of-output 20X3 20X4 20X5 20X6 20X7 Double Declining Balance 20X3 20X4 20X5 20X6 20X7 On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company's depreciation expense for 20X5. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use. Ashford University ACC205 Guidance Report Week Three YELLOW INDICATES ACCOUNT AMOUNTS CHANGED Change Account to: Based Upon Course Start Date Jan - Feb 5,000 Mar-Apr 6,000 May-Jun 7,000 Jul-Aug 8,000 Sept-Oct 9,000 Nov-Dec 10,000 720 150 730 140 740 130 750 120 760 110 770 100 31,000 32,000 33,000 34,000 35,000 36,000 1,100 1,200 1,300 1,400 1,500 1,600 55,000 52,800 60,000 57,800 65,000 62,800 70,000 67,800 75,000 72,800 80,000 77,800