Compare Two Depreciation Methods

Bayside Coatings Company purchased waterproofing equipment on January 2, 20Y4, for $190,000. The equipment was expected to have a useful life of four years and a residual value of $9,000.

Instructions:

Determine the amount of depreciation expense for the years ended December 31, 20Y4, 20Y5, 20Y6, and 20Y7, by (a) the straight-line method and (b) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method.

Depreciation Expense

Year Straight-Line Method Double-Declining-Balance Method

20Y4

20Y5

20Y6

20Y7

Total

Inventory by Three Cost Flow Methods

Details regarding the inventory of appliances on January 1, 20Y7, purchases invoices during the year, and the inventory count on December 31, 20Y7, of Amsterdam Appliances are summarized as follows:

Purchases Invoices

Model Inventory,

January 1 1st 2nd 3rd Inventory Count,

December 31

A10 4 at $ 64 4 at $ 70 4 at $ 76 6

B15 8 at $176 4 at 158 3 at 170 6 at 184 8

E60 3 at 75 3 at 65 15 at 68 9 at 70 5

G83 7 at 242 6 at 250 5 at 260 10 at 259 9

J34 12 at 240 10 at 246 16 at 267 16 at 270 15

M90 2 at 108 2 at 110 3 at 128 3 at 130 5

Q70 5 at 160 4 at 170 4 at 175 7 at 180 8

Instructions:

1.Determine the cost of the inventory on December 31, 20Y7, by the first-in, first-out method.

If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase. Under FIFO, if a model is in inventory at two different costs, enter the remaining units that were purchased most recently first.

First-In, First-Out Method

Model Quantity Unit Cost Total Cost

A10

B15

E60

G83

J34

M90

Q70

Total

2.Determine the cost of the inventory on December 31, 20Y7, by the last-in, first-out method, following the procedures indicated in (1). Under LIFO, if a model is in inventory at two different costs, enter the remaining units that were purchased earliest first.

Last-In, First-Out Method

Model Quantity Unit Cost Total Cost

A10

B15

E60

G83

J34

M90

Q70

Total

3.Determine the cost of the inventory on December 31, 20Y7, by the average cost method.

Average Cost Method

Model Quantity Unit Cost Total Cost

A10

B15

E60

G83

J34

M90

Q70

Total

4.Which method (FIFO or LIFO) would be preferred for income tax purposes in periods of rising prices?

Which method (FIFO or LIFO) would be preferred for income tax purposes in periods of declining prices?

Allowance Method for Doubtful Accounts

Averys All-Natural Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Averys All-Natural prepared the following aging-of-receivables schedule as of the end of business on December 31, 20Y7:

Days Past Due

Customer Balance Not Past

Due 1-30 31-60 61-90 91-120 Over 120

AAA Beauty 27,500 27,500

Amelia's Wigs 3,750 3,750

Zim's Beauty 1,650 1,650

Totals 1,100,000 750,000 180,000 75,000 45,000 22,000 28,000

Averys All-Natural Company has a past history of uncollectible accounts by age category, as follows:

Age Class Percent

Uncollectible

Not past due 1 %

1-30 days past due 3

31-60 days past due 7

61-90 days past due 16

91-120 days past due 40

Over 120 days past due 90

Instructions:

1.Estimate the allowance for doubtful accounts, based on the aging-of-receivables schedule.

fill in the blank 1

2.Assume that the allowance for doubtful accounts for Averys All-Natural Company has a negative balance of $(2,250) before adjustment on December 31, 20Y7. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts.

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

-

+

=

+

20Y7 Dec. 31

Statement of Cash Flows Income Statement

3.Averys All-Natural Company reported credit sales of $2,400,000 during 20Y7. Assume that instead of using the analysis of receivables method of estimating uncollectible accounts, Natural Hair Company uses the percent of sales method and estimates that 2.5% of sales will be uncollectible. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts using the percent of sales method.

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

-

+

=

+

20Y7 Dec. 31

Statement of Cash Flows Income Statement

4.Assume that on March 4, 20Y8, Averys All-Natural wrote off the $2,950 account of Superior Images as uncollectible. Illustrate the effect on the accounts and financial statements of the write-off of the Superior Images account.

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

-

=

+

20Y8 Mar. 4

Statement of Cash Flows Income Statement

5.Assume that on August 17, 20Y8, Superior Images paid $2,950 on its account. Illustrate the effect on the accounts and financial statements of reinstating and collecting the Superior Images account.

(a) Reinstatement

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

-

=

+

20Y8 Aug. 17

Statement of Cash Flows Income Statement

(b) Collection

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

+

=

+

20Y8 Aug. 17

Statement of Cash Flows Income Statement

6.Assume that instead of using the allowance method, Averys All-Natural uses the direct writeoff method. Illustrate the effect on the accounts and financial statements of the following:

a.The write-off of the Superior Images account on March 4, 20Y8.

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

+

=

+

20Y8 Mar. 4

Statement of Cash Flows Income Statement

b.The (1) reinstatement and (2) collection of the Superior Images account on August 17, 20Y8.

(1) reinstatement

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

+

=

+

20Y8 Aug. 17

Statement of Cash Flows Income Statement

(2) collection

If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows Balance Sheet

Assets = Liabilities + Stockholders' Equity

+

=

+

20Y8 Aug. 17

Statement of Cash Flows Income Statement