Problem 1 The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31, 2012: Cash $ 29,090 Equity Investments (trading) 60,000 Accounts Receivable 69,000 Allowance for Doubtful Accounts $ 500 Inventory 54,720 Prepaid Rent 36,000 Plant Assets 160,000 Accumulated Depreciation-Plan Assets 14,740 Accounts Payable 11,370 Bonds Payable 90,000 Common Stock 170,000 Retained Earnings 97,180 Sales Revenue 214,800 Cost of Goods Sold 154,400 Freight-Out 11,000 Salaries and Wages Expense 32,000 Interest Expense 2,040 Rent Revenue 21,600 Miscellaneous Expense 890 Insurance Expense 11,050 $620,190 $620,190 Additional Data: 1. The balance in the Insurance Expense account contains the premium costs of three policies: Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2011; Policy 2, original cost of $7,200, 3-yr. term, taken out on Oct. 1, 2012; Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2012. 2. On September 30, 2012, Alt received $21,600 rent from its lessee for an eighteen month lease beginning on that date. 3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2011, the balance of the Plant and Equipment account was $240,000. 4. On December 28, 2012, the bookkeeper incorrectly credited Sales for a receipt on account in the amount of $10,000. 5. At December 31, 2012, salaries and wages accrued but unpaid were $4,200. 6. Alt estimates that 1% of sales will become uncollectible. 7. On August 1, 2012, Alt purchased, as a short-term investment, 60 $1,000, 7% bonds of Allen Corp. at par. The bonds mature on August 1, 2013. Interest payment dates are July 31 and January 31. 8. On April 30, 2012, Alt rented a warehouse for $3,000 per month, paying $36,000 in advance. Instructions (a) Record the necessary correcting and adjusting entries. (b) Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period. Problem 3 List the corrections needed to present in good form the balance sheet below. Errors include misclassifications, lack of adequate disclosure, and poor terminology. Do not concern yourself with the arithmetic. If an item can be classified in more than one category, select the category most favored by the authors of your textbook. Tanner Corporation Balance Sheet For the year ended December 31, 2012 Assets Current Assets: Cash $ 18,000 Equity investments-trading (fair value, $32,000) 27,000 Accounts receivable 75,000 Inventory 60,000 Supplies inventory 3,000 Investment in subsidiary company 60,000 $243,000 Investments: Treasury stock 78,000 Tangible Fixed Assets: Buildings and land 213,000 Less: Reserve for depreciation 60,000 153,000 Deferred Charges: Discount on bonds payable 3,000 Other Assets: Cash surrender value of life insurance 54,000 $531,000 Liabilities and Capital Current Liabilities: Accounts payable $ 45,000 Reserve for income taxes 42,000 Customer's accounts with credit balances 3 $ 87,003 Long-Term Liabilities: Bonds payable 120,000 Total Liabilities 207,003 Capital Stock: Capital stock 225,000 Earned surplus 74,997 Cash dividends declared 24,000 323,997 $531,000 Problem 6 Presented below is data relative to the 12/31/12 inventory of Lance Company: Number Units Original Cost Total Current Item In Inventory Per Unit Original Cost Replacement Cost A 5,000 $1.09 $5,450 $1.08 B 5,000 1.30 6,500 1.15 C 5,000 1.50 7,500 1.05 D 5,000 1.60 8,000 1.65 E 5,000 1.80 9,000 1.70 Total 25,000 $36,450 Appropriate Upper Lower Inventory Limit Limit Designated Valuation Item ("Ceiling") ("Floor") Market (Totals) A B C D E Total Additional Data: Selling price is $2.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 35% of selling price. Instructions Complete the last four columns above. Problem 7 On December 31, 2011 Berry Corporation sold some of its product to Flynn Company, accepting a 3%, four-year promissory note having a maturity value of $500,000 (interest payable annually on December 31). Berry Corporation pays 6% for its borrowed funds. Flynn Company, however, pays 8% for its borrowed funds. The product sold is carried on the books of Berry at a manufactured cost of $310,000. Assume Berry uses a perpetual inventory system. Instructions (a) Prepare the journal entries to record the transaction on the books of Berry Corporation at December 31, 2011. (Assume that the effective interest method is used. Use the interest tables below and round to the nearest dollar.) (b) Make all appropriate entries for 2012 on the books of Berry Corporation. (c) Make all appropriate entries for 2013 on the books of Berry Corporation. For Use on Problem B-III Table 1 Future Value of 1 Periods 2% 3% 4% 6% 8% 1 1.02000 1.03000 1.04000 1.06000 1.08000 2 1.04040 1.06090 1.08160 1.12360 1.16640 3 1.06121 1.09273 1.12486 1.19102 1.25971 4 1.08243 1.12551 1.16986 1.26248 1.36049 5 1.10408 1.15927 1.21665 1.33823 1.46933 Table 2 Present Value of 1 Periods 2% 3% 4% 6% 8% 1 0.98039 0.97087 0.96154 0.94340 0.92593 2 0.96117 0.94260 0.92456 0.89000 0.85734 3 0.94232 0.91514 0.88900 0.83962 0.79383 4 0.92385 0.88849 0.85480 0.79209 0.73503 5 0.90573 0.86261 0.82193 0.74726 0.68058 Table 3 Future Value of Ordinary Annuity of 1 Periodic Rents 2% 3% 4% 6% 8% 1 1.00000 1.00000 1.00000 1.00000 1.00000 2 2.02000 2.03000 2.04000 2.06000 2.08000 3 3.06040 3.09090 3.12160 3.18360 3.24640 4 4.12161 4.18363 4.24646 4.37462 4.50611 5 5.20404 5.30914 5.41632 5.63709 5.86660 Table 4 Present Value of Ordinary Annuity of 1 Periodic Rents 2% 3% 4% 6% 8% 1 0.98039 0.97087 0.96154 0.94340 0.92593 2 1.94156 1.91347 1.88609 1.83339 1.78326 3 2.88388 2.82861 2.77509 2.67301 2.57710 4 3.80773 3.71710 3.62990 3.46511 3.31213 5 4.71346 4.57971 4.45182 4.21236 3.99271

Problem 1 The following list of accounts and their balances represents the unadjusted trial balance of Alt Company at December 31, 2012: Cash Equity Investments (trading) 60,000 Accounts Receivable 69,000 Allowance for Doubtful Accounts Inventory 54,720 Prepaid Rent 36,000 Plant Assets 160,000 Accumulated Depreciation-Plan Assets Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Revenue Cost of Goods Sold 154,400 Freight-Out 11,000 Salaries and Wages Expense 32,000 Interest Expense 2,040 Rent Revenue Miscellaneous Expense 890 Insurance Expense 11,050 $620,190 Additional Data: $ 29,090 $ 500 14,740 11,370 90,000 170,000 97,180 214,800 21,600 $620,190 1. The balance in the Insurance Expense account contains the premium costs of three policies: Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2011; Policy 2, original cost of $7,200, 3-yr. term, taken out on Oct. 1, 2012; Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2012. 2. On September 30, 2012, Alt received $21,600 rent from its lessee for an eighteen month lease beginning on that date. 3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2011, the balance of the Plant and Equipment account was $240,000. 4. On December 28, 2012, the bookkeeper incorrectly credited Sales for a receipt on account in the amount of $10,000. 5. At December 31, 2012, salaries and wages accrued but unpaid were $4,200. 6. Alt estimates that 1% of sales will become uncollectible. 7. On August 1, 2012, Alt purchased, as a short-term investment, 60 $1,000, 7% bonds of Allen Corp. at par. The bonds mature on August 1, 2013. Interest payment dates are July 31 and January 31. 8. On April 30, 2012, Alt rented a warehouse for $3,000 per month, paying $36,000 in advance. Instructions (a) Record the necessary correcting and adjusting entries. (b) Indicate which of the adjusting entries may be reversed at the beginning of the next accounting period. Problem 2 Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the space(s) provided. A letter may be used more than once or not at all. a. b. c. d. e. Historical cost Relevance Monetary unit Going concern Consistency f. g. h. i. j. Economic entity Materiality Conservatism Periodicity Expense recognition representation k. l. m. n. o. Revenue recognition Full disclosure Cost constraint Industry practices Faithful ______ 1. Chose the solution that will be least likely to overstate assets or income. ______ 2. Describing the depreciation methods used in the financial statements. ______ 3. Applying the same accounting treatment to similar accounting events. ______ 4. The quality which helps users make predictions about present, past, and future events. ______ 5. Recording a transaction when goods or services are exchanged for cash or claims to cash. ______ 6. Preparing consolidated statements. ______ 7. Information must make a difference or a company need not disclose it. ______ 8. Provides the figure at which to record a liability. ______ 9. The preparation of timely reports on continuing operations. ______ 10. Accrual accounting (do not use "going concern"). ______ 11. Reporting those items which are significant enough to affect decisions. Select two (11 and 12). ______ 12. See item 11 above. ______ 13. Ignoring the phenomenon of price-level changes (do not use "historical cost"). ______ 14. Not reporting assets at liquidation prices (do not use "historical cost"). ______ 15. Characterized by completeness, neutrality, and being free from error. ______ 16. Establishment of an allowance for doubtful accounts. ______ 17. Additivity of financial statement figures relating to different time periods. ______ 18. Carrying inventories at sales price less distribution costs. ______ 19. Use of estimating procedures for amortization policies. Select two (do not use "periodicity") (19 and 20). ______ 20. See item 19 above. Problem 3 List the corrections needed to present in good form the balance sheet below. Errors include misclassifications, lack of adequate disclosure, and poor terminology. Do not concern yourself with the arithmetic. If an item can be classified in more than one category, select the category most favored by the authors of your textbook. Tanner Corporation Balance Sheet For the year ended December 31, 2012 Assets Current Assets: Cash Equity investments-trading (fair value, $32,000) Accounts receivable Inventory Supplies inventory Investment in subsidiary company Investments: Treasury stock Tangible Fixed Assets: Buildings and land Less: Reserve for depreciation $ 18,000 27,000 75,000 60,000 3,000 60,000 $243,000 78,000 213,000 60,000 Deferred Charges: Discount on bonds payable Other Assets: Cash surrender value of life insurance 153,000 3,000 54,000 $531,000 Liabilities and Capital Current Liabilities: Accounts payable Reserve for income taxes Customer's accounts with credit balances $ 45,000 42,000 3 Long-Term Liabilities: Bonds payable Total Liabilities Capital Stock: Capital stock Earned surplus Cash dividends declared $ 87,003 120,000 207,003 225,000 74,997 24,000 323,997 $531,000 Problem 4 Specify, to the left of each account, the letter of the financial statement classification the account would appear in. Use only the classifications shown. Balance Sheet a. Current Assets b. Investments c. Property, Plant, and Equipment d. Intangible Assets e. Other Assets f. Current Liabilities g. Long-term Debt h. Capital Stock i. Retained Earnings Income and Retained Earnings Statement j. Sales Revenue k. Cost of Goods Sold l. Operating Expenses m. Other Revenues and Gains n. Other Expenses and Losses o. Extraordinary Item p. Retained Earnings Section q. Not on the Statements Account balances taken from the ledger of Morin Company on December 31, 2012 follow: ______ 1. Common Stock, $10 par ___16.Inventory ______ 2. Loss on Disposal of Equipment ___17.Salaries and Wages Expense ______ 3. Buildings ___18.Merchandise on order with supplier ______ 4. Office Expense ___19.Interest Revenue ______ 5. Allowance for Doubtful Accounts ___20.Selling Expenses ______ 6. Notes Payable (Short Term) ___21.Interest Expense ______ 7. Accum. DepreciationBuildings ___22.Income Taxes Payable ______ 8. Mortgage Payable due 2014 ___23.Insurance Expense ______ 9. Depletion Expense ___24.Advertising Expense ______ 10. Freight-Out ___25.Equity Investments ______ 11. Sales Revenue ___26.Accounts Receivable ______ 12. Dividends ___27.Land ______ 13. Retained Earnings Dec. 31, 2011 ___28.Accounts Payable ______ 14. Cash ______ 15. Sales Discounts ______ 29. Error made in computing 2010 depreciation expense ___30.Gain on Redemption of Debt Problem 5 In computing your answers to the cases below, you can round your answer to the nearest dollar. Present value tables are provided on the next page. Use the following information in answering Cases 1 and 2 below: On January 1, 2006, Gray Company sold $800,000 of 10% bonds, due January 1, 2016. Interest on these bonds is paid on July 1 and January 1 each year. According to the terms of the bond contract, Gray must establish a sinking fund for the retirement of the bond principal starting no later than January 1, 2014. Since Gray was in a tight cash position during the years 2006 through 2011, the first contribution into the fund was made on January 1, 2012. Case 1: Assume that, starting with the January 1, 2012 contribution, Gray desires to make a total of four equal annual contributions into this fund. Compute the amount of each of these contributions assuming the interest rate is 8% compounded annually. Case 2: Assume, instead, that starting with the January 1, 2014 contribution, Gray desires to make a total of five equal semiannual contributions into this fund. Compute the amount of each of these contributions assuming the annual interest rate is 12%, compounded semiannually. Case 3: On January 2, 2012, Nelson Company loaned $90,000 to Holt Company. The terms of this loan agreement stipulate that Holt is to make 5 equal annual payments to Nelson at 10% interest compounded annually. Assume the payments are to begin on December 31, 2012. Compute the amount of each of these payments. Case 4: Jim Marsh, a lawyer contemplating retirement on his 65th birthday, decides to create a fund on an 8% basis which will enable him to withdraw $50,000 per year beginning June 30, 2015, and ending June 30, 2019. To provide this fund, he intends to make equal contributions on June 30 of each of the years 2010 through 2014. (a) How much must the balance of the fund equal after the last contribution on June 30, 2014 in order for him to satisfy his objective? (b) What are each of his contributions to the fund? Table 1 Future Value of 1 9% Periods 6% 8% 1 2 3 4 5 1.06000 1.12360 1.19102 1.26248 1.33823 1.08000 1.16640 1.25971 1.36049 1.46933 Periods 6% 1 2 3 4 5 0.94340 0.89000 0.83962 0.79209 0.74726 Periods 6% 1 2 3 4 5 1.00000 2.06000 3.18360 4.37462 5.63709 Periods 6% 1 2 3 4 5 0.94340 1.83339 2.67301 3.46511 4.21236 Periods 6% 1 2 3 4 5 1.00000 1.94340 2.83339 3.67301 4.46511 1.09000 1.18810 1.29503 1.41158 1.53862 Table 2 Present Value of 1 8% 9% 0.92593 0.85734 0.79383 0.73503 0.68058 0.91743 0.84168 0.77218 0.70843 0.64993 10% 12% 1.10000 1.21000 1.33100 1.46410 1.61051 1.1200 1.2544 1.4049 1.5735 1.7623 10% 12% 0.90909 0.82645 0.75132 0.68301 0.62092 0.8928 0.7971 0.7117 0.6355 0.5674 Table 3 Future Value of an Ordinary Annuity of 1 8% 9% 10% 1.00000 2.08000 3.24640 4.50611 5.86660 1.00000 2.09000 3.27810 4.57313 5.98471 1.00000 2.10000 3.31000 4.64100 6.10510 Table 4 Present Value of an Ordinary Annuity of 1 8% 9% 10% 0.92593 1.78326 2.57710 3.31213 3.99271 0.91743 1.75911 2.53130 3.23972 3.88965 0.90909 1.73554 2.48685 3.16986 3.79079 Table 5 Present Value of an Annuity Due of 1 8% 9% 10% 1.00000 1.92593 2.78326 3.57710 4.31213 1.00000 1.91743 2.75911 3.53130 4.23972 1.00000 1.90909 2.73554 3.48685 4.16986 12% 1.0000 2.1200 3.3744 4.7793 6.3528 12% 0.8928 1.6900 2.4018 3.0373 3.6047 12% 1.0000 1.8928 2.6900 3.4018 4.0373 Problem 6 Presented below is data relative to the 12/31/12 inventory of Lance Company: Number Units ItemIn Inventory A 5,000 B 5,000 C5,000 D5,000 E 5,000 Total25,000 Upper Limit Item("Ceiling") Original Cost Total Current Per UnitOriginal CostReplacement Cost $1.09$5,450 $1.08 1.306,500 1.15 1.507,500 1.05 1.608,000 1.65 1.80 9,000 1.70 $36,450 Lower Limit ("Floor") Appropriate Inventory Designated Valuation Market (Totals) A B C D E Total Additional Data: Selling price is $2.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 35% of selling price. Instructions Complete the last four columns above. Problem 7 On December 31, 2011 Berry Corporation sold some of its product to Flynn Company, accepting a 3%, four-year promissory note having a maturity value of $500,000 (interest payable annually on December 31). Berry Corporation pays 6% for its borrowed funds. Flynn Company, however, pays 8% for its borrowed funds. The product sold is carried on the books of Berry at a manufactured cost of $310,000. Assume Berry uses a perpetual inventory system. Instructions (a) Prepare the journal entries to record the transaction on the books of Berry Corporation at December 31, 2011. (Assume that the effective interest method is used. Use the interest tables below and round to the nearest dollar.) (b) Make all appropriate entries for 2012 on the books of Berry Corporation. (c) Make all appropriate entries for 2013 on the books of Berry Corporation. For Use on Problem B-III Table 1 Future Value of 1 Periods 1 2 3 4 5 2% 1.02000 1.04040 1.06121 1.08243 1.10408 3% 1.03000 1.06090 1.09273 1.12551 1.15927 4% 1.04000 1.08160 1.12486 1.16986 1.21665 6% 1.06000 1.12360 1.19102 1.26248 1.33823 8% 1.08000 1.16640 1.25971 1.36049 1.46933 6% 0.94340 0.89000 0.83962 0.79209 0.74726 8% 0.92593 0.85734 0.79383 0.73503 0.68058 Table 2 Present Value of 1 Periods 1 2 3 4 5 2% 0.98039 0.96117 0.94232 0.92385 0.90573 3% 0.97087 0.94260 0.91514 0.88849 0.86261 4% 0.96154 0.92456 0.88900 0.85480 0.82193 Table 3 Future Value of Ordinary Annuity of 1 Periodic Rents 1 2 3 4 5 2% 1.00000 2.02000 3.06040 4.12161 5.20404 3% 1.00000 2.03000 3.09090 4.18363 5.30914 4% 1.00000 2.04000 3.12160 4.24646 5.41632 6% 1.00000 2.06000 3.18360 4.37462 5.63709 8% 1.00000 2.08000 3.24640 4.50611 5.86660 Table 4 Present Value of Ordinary Annuity of 1 Periodic Rents 1 2 3 4 5 2% 0.98039 1.94156 2.88388 3.80773 4.71346 3% 0.97087 1.91347 2.82861 3.71710 4.57971 4% 0.96154 1.88609 2.77509 3.62990 4.45182 6% 0.94340 1.83339 2.67301 3.46511 4.21236 8% 0.92593 1.78326 2.57710 3.31213 3.99271 Problem 8 In comparing and contrasting FIFO vs. LIFO inventory procedures, the following listing was developed. You are to complete the tabulation with an answer of "YES" or "NO" as demonstrated by the first item. Any combination of yes-no answers is possible in each situation. FIFO LIFO 0. Usually matches the actual physical flow of goods. Yes____ No_____ 1. Emphasizes the income statement in that it matches the more recent costs with revenue. ______ ______ 2. Defers tax payments in times of rising prices. ______ ______ 3. Possibility of liquidating the base may be a significant negative aspect. ______ ______ 4. Will probably not be adopted if prices are expected to decline. ______ ______ 5. Emphasizes the balance sheet in that the more recent costs are contained in the inventory account. ______ ______ 6. Can use price indexes to cost layers. ______ ______ 7. Switching to this method could cause problems in the equity markets, with loan covenants, etc. ______ ______ 8. Income figure more accurately reflects cash available for dividends, investments, etc. ______ ______ 9. Tends to smooth income in periods of fluctuating prices. ______ ______ 10. Income figure is more "real" in that it doesn't contain "paper profits." ______ ______ 11. A change to this method must be justified (i.e., to the auditor) other than solely on the basis of the tax effect. ______ ______ 12. Perpetual inventory results may be different from periodic inventory results. ______ ______ 13. Is acceptable to the IRS (i.e., for income tax purposes). ______ ______ 14. Gives lower profits when prices rise. ______ ______ 15. In a period of rising prices has an adverse effect on assets, working capital, and stockholders' equity. ______ ______ 16. Quick inventory turnover may have somewhat of a mitigating effect on some of the method's claimed disadvantages. ______ ______ 17. Improves cash flow in periods of rising prices. ______ ______ 18. If used for tax purposes, it must be used for financial reporting purposes. ______ ______ 19. Somewhat opens door for profit manipulation and may cause poor purchase decisions. ______ ______ 20. Is a current value, rather than a historical cost, valuation method. ______ ______ Problem 9 Abel Company's business year ends on December 31. Listed below are purchase transactions which occurred during the last few days of 2012 or during the first few days of 2013. The inventory, determined by physical count, was taken after the close of business on December 31, 2012. The only adjusting entry recorded to date has been to enter the December 31 physical inventory on the books and to remove the beginning inventory. Instructions (a) On the accompanying chart, indicate the effect of each of these transactions on the ending inventory and on reported net income for 2012, by writing the words overstated, understated, or no effect in the appropriate column. Both columns must be answered for each transaction. (b) Prepare all necessary correcting entries for 2012. (c) Indicate which of the correcting entries must be reversed in 2011 by preparing the necessary reversing entries. 12/31/12 Physical 2012 Inventory Income 1. An invoice for $9,000, terms f.o.b. shipping point, was received and entered December 30. The invoice shows that the merchandise was shipped December 29, and the receiving report indicates the merchandise was received January 2. ________ ________ 2. An invoice for $300, terms f.o.b. shipping point, was received and entered December 30. The invoice shows that merchandise was shipped December 29, and the receiving report shows the merchandise was received December 31. ________ ________ 3. An invoice for $4,000, terms f.o.b. shipping point, was received and entered January 2. The invoice shows the merchandise was shipped December 30, and the receiving report indicates the merchandise was received December 31. ________ ________ 4. An invoice for $800, terms f.o.b. destination, was received and entered December 30. The receiving report shows the merchandise was received January 2. ________ ________ 5. An invoice for $500, terms f.o.b. destination, was received and entered December 29. The receiving report indicates that the merchandise was received December 31. ________ ________ 6. An invoice for $1,500, terms f.o.b. destination, was received and entered January 2. The receiving report indicates the merchandise was received December 31. ________ ________ 7. Merchandise costing $12,000 and with a selling price of $18,000 was on consignment to Maris Distributing Company and was on that company's premises on December 31. No entry has been made for the consignment. ________ ________ Problem 10 A. Landmark Book Store uses the conventional retail method. Instructions Given the following data, prepare a neat, labeled schedule showing the computation of the cost of inventory on hand at 12/31/12. Inventory 1/1/12 Purchases Purchases Returns Purchase Discounts Sales (Gross) Sales Returns Employee Discounts Freight-in Freight-out Loss from Breakage Markups Markup Cancellations Markdowns Markdown Cancellations Cost $ 28,900 366,600 9,000 7,000 Retail $ 40,000 610,000 20,000 615,000 15,000 5,000 23,500 50,000 2,500 38,000 18,000 13,500 8,500 B. Landmark Book Store has decided to switch to the LIFO retail method for the period beginning 1/1/13. Instructions Prepare a schedule showing the computation of the 12/31/13 inventory under the LIFO retail method adjusted for price level changes (i.e., dollar-value LIFO Retail.) Without prejudice to your answer in requirement A above, assume that the 12/31/12 inventory computed under the LIFO Retail method was $40,000 and $27,500 at retail and cost, respectively, for purposes of this requirement. Data for 2013 follows: Cost Retail Purchases (net) $360,000 $485,000 Sales (net) 402,000 Markups (net) 30,000 Markdowns (net) 15,000 2012 Price Index 100 2013 Price Index 120 Problem 11 For each of the following questions, select the letter of the statement which best answers the question and write it on the line to the left of the question. _____ 1. Wade Company estimates the cost of its physical inventory at March 31 for use in an interim financial statement. The rate of markup on cost is 25%. The following account balances are available: Inventory, March 1 Purchases during March Purchase returns Sales during March $1,000,000 500,000 26,000 850,000 The estimate of the cost of inventory at March 31 would be a. $624,000. b. $680,000. c. $794,000. d. $836,500. _____ 2. Most methods of pricing inventories are in accord with generally accepted accounting principles and generally are permissible for income tax purposes. The method that must be used for financial reporting purposes if used for tax purposes is a. moving average. b. weighted average. c. LIFO. d. FIFO. _____ 3. A company has been using the FIFO cost method of inventory valuation since it was started 10 years ago. Its 2012 ending inventory was $120,000, but it would have been $90,000 if LIFO had been used. Thus, if LIFO had been used, this company's income before taxes would have been a. $30,000 less in 2012. b. $30,000 less over the 10-year period. c. $30,000 greater over the 10-year period. d. $30,000 greater in 2012. _____ 4. Why are inventories included in the computation of net income? a. To determine cost of goods sold. b. To determine sales revenue. c. To determine merchandise returns. d. Inventories are not included in the computation of net income. _____ 5. On December 31, 2012, Hill Company, which sells only one product, adopted the periodic lastin, first-out method of inventory valuation. The inventory was valued at $40,000 on the December 31, 2012 balance sheet. The number of items in its inventory remained constant during 2013. The December 31, 2013 inventory valuation would be a. less than $40,000 if prices were steadily decreasing. b. less than $40,000 if prices were steadily increasing. c. greater than $40,000 if prices were steadily increasing. d. $40,000 regardless of any price changes. _____ *6. Kramer Company values its inventory by using the retail method (LIFO basis, stable prices). The following information is available for the year 2012. Beginning inventory Purchases Freight-in Markups (net) Markdowns (net) Sales Cost $ 78,000 368,000 16,000 Retail $140,000 628,000 18,000 6,000 610,000 At what amount would Kramer Company report its ending inventory? a. $95,700. b. $96,000. c. $100,300. d. $102,000. Problem 12 Match the following cost items with these appropriate accounts: a. Land c. Land Improvements b. Buildings d. Other _____ 1. Interest cost incurred during building construction. _____ 2. Back taxes on purchased plot of land to be used for building site. _____ 3. Assessment by city for drainage system. _____ 4. Building permits. _____ 5. Landscaping shrubs planted after building has been constructed. _____ 6. Demolition costs of building on land bought for plant site. _____ 7. Interest cost incurred after completion of building construction. _____ 8. Recording fees for land. _____ 9. Architect's fees. _____ 10. Grading and filling building site. _____ 11. Parking lots. _____ 12. Fences. Problem 13 Identify (in accordance with FASB Statement No. 2) each of the following activities as: a. Research and development _____ b. Not research and development 1. Testing in search for, or evaluation of, product or process alternatives. _____ 2. Cost of marketing research to promote new product. _____ 3. Adaptation of an existing capability to a particular requirement or customer's need. _____ 4. Design, construction, and testing of pre-production prototypes and models. _____ 5. Routine, on-going efforts to refine, enrich, or improve the qualities of an existing product. _____ 6. Engineering activity required to advance the design of a product to the manufacturing stage. _____ 7. Searching for applications of new research findings. _____ 8. Laboratory research aimed at discovery of new knowledge. _____ 9. Conceptual formulation and design of possible product or process alternatives. _____ 10. Trouble-shooting break-downs during production. _____ 11. Periodic design changes to existing products. _____ 12. Quality control during commercial production including routine testing. _____ 13. Costs of testing prototype and design modifications. _____ 14. Engineering follow-through in an early phase of production. _____ 15. Design, construction, and operation of a pilot plant not useful for commercial production. Problem 14 Assume that the following cases are independent and rely on the following data. Make entries on the books of both companies. Jensen Co. Merton Co. Equipment (cost) $900,000 $1,650,000 Accumulated depreciation 290,000 900,000 Fair value of equipment 700,000 700,000 1. Jensen Co. and Merton Co. traded the above equipment. The exchange has commercial substance. Jensen Co.'s Books: Merton Co.'s Books: 2. Jensen Co. and Merton Co. traded the above equipment. The exchange lacks commercial substance. Jensen Co.'s Books: Merton Co.'s Books: Assume that the following cases are independent and rely on the following data. Make entries on the books of both companies. Jensen Co. Merton Co. Equipment (cost) $900,000 $1,650,000 Accumulated depreciation 290,000 1,050,000 Fair value of equipment 560,000 700,000 Cash received (paid) (140,000) 140,000 3. Jensen Co. and Merton Co. traded the above equipment. The exchange has commercial substance. Jensen Co.'s Books: Merton Co.'s Books: 4. Jensen Co. and Merton Co. traded the above equipment. The exchange lacks commercial substance. Jensen Co.'s Books: Merton Co.'s Books: Problem 15 A high-speed multiple-bit drill press costing $720,000 has an estimated salvage value of $60,000 and a life of ten years. What is the annual depreciation for each of the first two full years under the following depreciation methods? 1. Double-declining-balance method: a. Year one, $______________. b. Year two, $______________. 2. Units of production (activity) method (lifetime output is estimated at 110,000 units; the press produced 12,000 units in year one and 18,000 in year two): a. Year one, $______________. b. Year two, $______________. 3. Sum-of-the-years'-digits method: a. Year one, $______________. b. Year two, $______________. 4. Straight-line depreciation method: a. Year one, $______________. b. Year two, $______________