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(1) On October 5, Narveson Company buys merchandise on account from Rossi Company. The selling price of the goods is $6,020, and the cost to Rossi Company is $3,120. On October 8, Narveson returns defective goods with a selling price of $710 and a scrap value of $380. Record the transactions of Narveson Company, assuming a perpetual approach. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit Oct. 5 Oct. 8 (2) On October 5, Narveson Company buys merchandise on account from Rossi Company. The selling price of the goods is $5,410, and the cost to Rossi Company is $3,980. On October 8, Narveson returns defective goods with a selling price of $730 and a scrap value of $380. Record the transactions on the books of Rossi Company, assuming a perpetual approach. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit (3) The following information is available for Vogt Corp. for the year ended December 31, 2014: Other revenues and gains $14,400 Sales revenue $671,700 Other expenses and losses 15,200 Operating expenses 194,400 Cost of goods sold 169,600 Sales returns and allowances 38,100 Prepare a multiple-step income statement for Vogt Corp. The company has a tax rate of 30%. VOGT CORP. Income Statement For the Year Ended December 31, 2014 (4) Mountain Lake Corporation's accounting records show the following at year-end December 31, 2014: Purchase Discounts $7,640 Freight-In 9,690 Beginning Inventory Ending Inventory Freight-Out 10,360 Purchase Returns and Allowances Purchases 164,900 $33,290 29,020 3,280 Assuming that Mountain Lake Corporation uses the periodic system, compute cost of goods purchased and cost of goods sold. Cost of goods purchased $ Cost of goods sold $ (5) Recently, it was announced that two giant French retailers, Carrefour SA and Promodes SA, would merge. A headline in the Wall Street Journal blared, \"French Retailers Create New Wal-Mart Rival.\" While Wal-Mart's total sales would still exceed those of the combined company, Wal-Mart's international sales are far less than those of the combined company. This is a serious concern for Wal-Mart, since its primary opportunity for future growth lies outside of the United States. Below are basic financial data for the combined corporation (in euros) and WalMart (in U.S. dollars). Even though their results are presented in different currencies, by employing ratios we can make some basic comparisons. Carrefour (in million) Wal-Mart (in millions) Sales revenue 70,486 $256,329 Cost of goods sold 54,630 198,747 Net income 1,738 9,054 Total assets 39,063 104,912 Current assets 14,521 34,421 Current liabilities 13,660 37,418 Total liabilities 29,434 61,289 Compare the two companies by answering the following. Calculate the gross profit rate for each of the companies, and discuss their relative abilities to control cost of goods sold. (Refer to Broadening Your Perspective 5-4.) (6) Purpose: No financial decision-maker should ever rely solely on the financial information reported in the annual report to make decisions. It is important to keep abreast of financial news. This activity demonstrates how to search for financial news on the Internet. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel Steps 1. Type in either Wal-Mart, Target Corp., or Kmart. 2. Choose News. 3. Select an article that sounds interesting to you and that would be relevant to an investor in these companies. (a) What was the source of the article (e.g., Reuters, Businesswire, Prnewswire)? (b) Assume that you are a personal financial planner and that one of your clients owns stock in the company. Write a brief memo to your client summarizing the article and explaining the implications of the article for their investment. (7) Three years ago, Sue Kienholz and her brother-in-law Jeremy Reyes opened Megamart Department Store. For the first 2 years, business was good, but the following condensed income statement results for 2014 were disappointing. MEGAMART DEPARTMENT STORE Income Statement For the Year Ended December 31, 2014 Net sales $700,000 Cost of goods sold 560,000 Gross profit 140,000 Operating expenses Selling expenses Administrative expenses $100,000 20,000 120,000 Net income $20,000 Sue believes the problem lies in the relatively low gross profit rate of 20%. Jeremy believes the problem is that operating expenses are too high. Sue thinks the gross profit rate can be improved by making two changes. (1) Increase average selling prices by 15%; this increase is expected to lower sales volume so that total sales dollars will increase only 4%. (2) Buy merchandise in larger quantities and take all purchase discounts; these changes are expected to increase the gross profit rate from 20% to 25%. Sue does not anticipate that these changes will have any effect on operating expenses. Jeremy thinks expenses can be cut by making these two changes. (1) Cut 2014 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales. (2) Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2014 delivery expenses of $40,000 by 40%. Jeremy feels that these changes will not have any effect on net sales. Sue and Jeremy come to you for help in deciding the best way to improve net income. With the class divided into groups, answer the following. Prepare a condensed income statement for 2015 assuming Sue's changes are implemented. MEGA MART DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2015 Prepare a condensed income statement for 2015 assuming Jeremy's ideas are adopted. MEGA MART DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2015 Prepare a condensed income statement for 2015 assuming both sets of proposed changes are made. MEGA MART DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2015 (8) The following situation is presented in chronological order. 1. Shafer decides to buy a surfboard. 2. He calls Surfing USA Co. to inquire about their surfboards. 3. Two days later, he requests Surfing USA Co. to make him a surfboard. 4. Three days later, Surfing USA Co. sends him a purchase order to fill out. 5. He sends back the purchase order. 6. Surfing USA Co. receives the completed purchase order. 7. Surfing USA Co. completes the surfboard. 8. Shafer picks up the surfboard. 9. Surfing USA Co. bills Shafer. 10. Surfing USA Co. receives payment from Shafer. In a memo to the president of Surfing USA Co., answer the following questions. (a) When should Surfing USA Co. record the sale? (b) Suppose that with his purchase order, Shafer is required to make a down payment. Would that change your answer? (9) Andrea Tabares was just hired as the assistant treasurer of Northshore Stores, a specialty chain store company that has nine retail stores concentrated in one metropolitan area. Among other things, the payment of all invoices is centralized in one of the departments Andrea will manage. Her primary responsibility is to maintain the company's high credit rating by paying all bills when due and to take advantage of all cash discounts. William Parks, the former assistant treasurer, who has been promoted to treasurer, is training Andrea in her new duties. He instructs Andrea that she is to continue the practice of preparing all checks \"net of discount\" and dating the checks the last day of the discount period. \"But,\" William continues, \"we always hold the checks at least 4 days beyond the discount period before mailing them. That way we get another 4 days of interest on our money. Most of our creditors need our business and don't complain. And, if they scream about our missing the discount period, we blame it on the mail room or the post office. We've only lost one discount out of every hundred we take that way. I think everybody does it. By the way, welcome to our team!\" Should Andrea continue the practice started by William? Does she have any choice? Andrea continue the practice started by William. She a choice. (10) Dobler Company just took its physical inventory on December 31. The count of inventory items on hand at the company's business locations resulted in a total inventory cost of $306,300. In reviewing the details of the count and related inventory transactions, you have discovered the following items that had not been considered. 1. Dobler has sent inventory costing $28,588 on consignment to Phillips Company. All of this inventory was at Phillips's showrooms on December 31. 2. The company did not include in the count inventory (cost, $20,420) that was sold on December 28, terms FOB shipping point. The goods were in transit on December 31. 3. The company did not include in the count inventory (cost, $13,273) that was purchased with terms of FOB shipping point. The goods were in transit on December 31. Compute the correct December 31 inventory. Correct December 31 inventory $ (11)The accounting records of Tuel Electronics show the following data. Beginning inventory 3,990 units at $8 Purchases 8,540 units at $10 Sales 9,820 units at $13 Calculate average unit cost. (Round answer to 3 decimal places, e.g. 5.125.) Average unit cost $ per unit Determine cost of goods sold during the period under a periodic inventory system using the FIFO method, the LIFO method, and the average-cost method. (Round answers to 0 decimal places, e.g. 125.) FIFO LIFO Average-cost Cost of goods sold $ $ $ (12) Farwell Company sells three different categories of tools (small, medium and large). The cost and market value of its inventory of tools are as follows. Cost Market $ 84,480 $ 80,520 Medium 382,800 343,200 Large 200,640 220,440 Small Determine the value of the company's inventory under the lower-of-cost-or-market approach. The total inventory value $ (13) The accounting records of Tuel Electronics show the following data. Beginning inventory 3,990 units at $8 Purchases 8,540 units at $10 Sales 9,820 units at $13 Calculate average unit cost. (Round answer to 3 decimal places, e.g. 5.125.) Average unit cost $ per unit Determine cost of goods sold during the period under a periodic inventory system using the FIFO method, the LIFO method, and the average-cost method. (Round answers to 0 decimal places, e.g. 125.) FIFO Cost of goods sold $ $ $ LIFO Average-cost (14) Farwell Company sells three different categories of tools (small, medium and large). The cost and market value of its inventory of tools are as follows. Cost Market $ 84,480 $ 80,520 Medium 382,800 343,200 Large 200,640 220,440 Small Determine the value of the company's inventory under the lower-of-cost-or-market approach. The total inventory value $ (15) Early in 2014, Defoor Company switched to a just-in-time inventory system. Its sales and inventory amounts for 2013 and 2014 are shown below. 2013 2014 Sales revenue $3,155,400 $3,784,400 Cost of goods sold 1,274,800 1,595,100 Beginning inventory 186,300 217,900 Ending inventory 217,900 88,700 Determine the inventory turnover for 2013 and 2014. (Round answers to 1 decimal place, e.g. 5.1.) 2013 2014 Inventory turnover Determine the days in inventory for 2013 and 2014. (Round answers to 1 decimal place, e.g. 5.1.) 2013 Days in inventory 2014 days days (16) Suppose the following information is from the 2014 annual report of American Greetings Corporation (all dollars in thousands). Feb. 28, 2014 Feb. 28, 2013 $232,893 $244,379 7,068 10,516 49,937 ---------289,898 86,025 ---------- 43,861 --------298,756 82,085 ---------- Total (as reported) $203,873 $216,671 Cost of goods sold $809,956 780,771 Current assets (as reported) $561,395 $669,340 Current liabilities $343,405 $432,321 Inventories Finished goods Work in process Raw materials and supplies Less: LIFO reserve The notes to the company's financial statements also include the following information. Finished products, work in process, and raw material inventories are carried at the lower-of-cost-or-market. The last-in, first-out (LIFO) cost method is used for approximately 75% of the domestic inventories in 2014 and approximately 70% in 2013. The foreign subsidiaries principally use the first-in, first-out (FIFO) method. Display material and factory supplies are carried at average-cost. Calculate the company's inventory turnover and days in inventory for 2013 and 2014. (2012 inventory was $182,618.) (Round answers to 1 decimal place, e.g. 15.2.) 2014 2013 Inventory turnover times times Days in inventory days days State the implications of any change in the ratios. The inventory turnover from 2013 to 2014. What percentage of total inventory does the 2014 LIFO reserve represent? (Round answers to 0 decimal places, e.g. 15%.) LIFO reserve % If the company used FIFO in 2014, what would be the value of its inventory? Value of inventory $ Calculate the company's 2014 current ratio with the numbers as reported, then recalculate after adjusting for the LIFO reserve. (Round answers to 2 decimal places, e.g. 15.25:1.) Current ratio before LIFO reserve :1 Current ratio after LIFO reserve :1 (17) Use SEC filings to learn about a company's inventory accounting practices. Address: http://biz.yahoo.com/p/_capgds-bldmch.html, or go to www.wiley.com/college/kimmel Steps 1. Go to this site and click on the name of an equipment manufacturer other than those discussed in the chapter. 2. Click on SEC filings. 3. Under \"Recent filings\" choose Form 10K (annual report) and click on Full Filing at Edgar Online. 4. Choose option \"3,\" Online HTML Version. If the 10K is not listed among the recent filings, then click on View All Filings on EDGAR Online. Review the 10K to answer the following questions. (a) What is the name of the company? (b) How has its inventory changed from the previous year? What is the amount of raw materials, work in process, and finished goods inventory? (c) What inventory method does the company use? (d) Calculate the inventory turnover and days in inventory for the current year. (e) If the company uses LIFO, what was the amount of its LIFO reserve? (18) Heineken Electronics has enjoyed tremendous sales growth during the last 10 years. However, even though sales have steadily increased, the company's CEO, Beth Dains, is concerned about certain aspects of its performance. She has called a meeting with the corporate controller and the vice presidents of finance, operations, sales, and marketing to discuss the company's performance. Beth begins the meeting by making the following observations: We have been forced to take significant write-downs on inventory during each of the last three years because of obsolescence. In addition, inventory storage costs have soared. We rent four additional warehouses to store our increasingly diverse inventory. Five years ago inventory represented only 20% of the value of our total assets. It now exceeds 35%. Yet, even with all of this inventory, \"stockouts\" (measured by complaints by customers that the desired product is not available) have increased by 40% during the last three years. And worse yet, it seems that we constantly must discount merchandise that we have too much of. Beth asks the group to review the following data and make suggestions as to how the company's performance might be improved. (in millions) 2014 2013 2012 2011 Inventory Raw materials $242 $198 $155 $128 Work in process 116 77 49 33 Finished goods 567 482 398 257 Total inventory $925 $757 $602 $418 Current assets $1,800 $1,42 $ 1,183 $841 Total assets $2,643 $2,523 $2,408 $2,090 $600 $590 $525 $420 Sales revenue $9,428 $8,674 $7,536 $6,840 Cost of goods sold $6,328 $5,474 $4,445 $3,557 $754 $987 $979 $958 Current liabilities Net income Using the information provided, answer the following questions. (a) Discuss the trends and potential causes of the changes in the ratios. (Refer to the book values of Broadening Your Perspective 6-6.) (b) Discuss potential remedies to any problems discussed in part (a). (c) What concerns might be raised by some members of management with regard to your suggestions in part (b)? (19) In a discussion of dramatic increases in coffee-bean prices, a Wall Street Journal article noted the following fact about Starbucks. Before this year's bean-price hike, Starbucks added several defenses that analysts say could help it maintain earnings and revenue. The company last year began accounting for its coffee-bean purchases by taking the average price of all beans in inventory. Prior to this change, the company was using FIFO. Your client, the CEO of Supreme Coffee, Inc., read this article and sent you an email message requesting that you explain why Starbucks might have taken this action. Your response should explain what impact this change in accounting method has on earnings, why the company might want to do this, and any possible disadvantages of such a change. (20) You are the controller of Fagan Inc. K. L. Howard, the president, recently mentioned to you that she found an error in the 2013 financial statements which she believes has corrected itself. She determined, in discussions with the purchasing department, that 2013 ending inventory was overstated by $1 million. K. L. says that the 2014 ending inventory is correct, and she assumes that 2014 income is correct. K. L. says to you, \"What happened has happened there's no point in worrying about it anymore.\" You conclude that K. L. is incorrect. Write a brief, tactful memo to her, clarifying the situation. (21) Reagen Wholesale Corp. uses the LIFO cost flow method. In the current year, profit at Reagen is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year's net income and to take advantage of the changing income tax rate, the president of Reagen Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value. (a)What is the effect of this transaction on this year's and next year's income statement and income tax expense? Why? (b)If Reagen Wholesale had been using the FIFO method of inventory costing, would the president give the same directive? (c)Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order? (22) Shellhammer Company purchased a delivery truck. The total cash payment was $33,640, including the following items. Negotiated purchase price $25,390 Installation of special shelving 2,230 Painting and lettering 860 Motor vehicle license 140 Annual insurance policy 2,990 Sales tax 2,030 ---------- Total paid $33,640 Calculate the cost of the delivery truck. The cost of the delivery truck $ (23) On January 1, 2014, Wolf Creek Country Club purchased a new riding mower for $15,300. The mower is expected to have a 20-year life with a $1,500 salvage value. What journal entry would Wolf Creek make on December 31, 2014, if it uses straight-line depreciation? (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit (24) Relaford Corporation purchased a piece of equipment for $59,500. It estimated an 9-year life and $2,110 salvage value. At the end of year 4 (before the depreciation adjustment), it estimated the new total life to be 11 years and the new salvage value to be $4,380. Compute the revised depreciation. Company uses straight-line depreciation method. (Round answers to 0 decimal places, e.g. 125.) Revised depreciation $ (25) Thornton Company has an old factory machine that cost $63,000. The machine has accumulated depreciation of $35,280. Thornton has decided to sell the machine. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a) What entry would Thornton make to record the sale of the machine for $31,500 cash? (b) What entry would Thornton make to record the sale of the machine for $18,900 cash? No. Account Titles and Explanation Debit Credit (a) (b) (26)Match the statement with the term most directly associated with it. 1. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. 2. The allocation of the cost of an intangible asset to expense in a rational and systematic manner. 3. A right to sell certain products or services, or use certain trademarks or trade names within a designated geographic area. 4. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred. 5. The excess of the cost of a company over the fair value of the net assets required. (27) The March 29, 2012, edition of the Wall Street Journal Online contains an article by Miguel Bustillo entitled, \"Best Buy Forced to Rethink Big Box.\" The article explains how the 1,100 giant stores, which enabled Best Buy to obtain its position as the largest retailer of electronics, are now reducing the company's profitability and even threatening its survival. The problem is that many customers go to Best Buy stores to see items but then buy them for less from online retailers. As a result, Best Buy recently announced that it would close 50 stores and switch to smaller stores. However, some analysts think that these changes are not big enough. The following data were extracted from the 2011 and 2006 annual reports of Best Buy. (All amounts are in millions.) 2011 Total assets at year-end 2010 $17,849 Net sales Net income $18,302 2006 $11,864 50,272 30,848 1,277 1,140 2005 $10,294 Using the data above, answer the following questions. Compute the profit margin, asset turnover, and return on assets for 2011 and 2006. (Round all percentages to 1 decimal places, e.g. 15.1% and asset turnover ratio to 2 decimal places, e.g. 15.21.) 2011 2006 % % times times % % Profit Margin Asset Turnover Return on Assets Present the ratios calculated in above in the equation format. (Round asset turnover ratio to 2 decimal places, e.g. 15.21 and all other answers to 1 decimal places, e.g. 15.1%.) Profit Margin 2006 % Asset Turnover % = Return on Assets 2011 % % (28) Purpose: Use an annual report to identify a company's plant assets and the depreciation method used. Address: www.annualreports.com, or go to www.wiley.com/college/kimmel Steps 1. Select a particular company. 2. Search by company name. 3. Follow instructions below. Answer the following questions. (a)What is the name of the company? (b)What is the Internet address of the annual report? (c)At fiscal year-end, what is the net amount of its plant assets? (d)What is the accumulated depreciation? (e)Which method of depreciation does the company use? (29) Payton Furniture Corp. is nationally recognized for making high-quality products. Management is concerned that it is not fully exploiting its brand power. Payton's production managers are also concerned because their plants are not operating at anywhere near full capacity. Management is currently considering a proposal to offer a new line of affordable furniture. Those in favor of the proposal (including the vice president of production) believe that, by offering these new products, the company could attract a clientele that it is not currently servicing. Also, it could operate its plants at full capacity, thus taking better advantage of its assets. The vice president of marketing, however, believes that the lower-priced (and lower-margin) product would have a negative impact on the sales of existing products. The vice president believes that $10,000,000 of the sales of the new product will be from customers that would have purchased the more expensive product but switched to the lower-margin product because it was available. (This is often referred to as cannibalization of existing sales.) Top management feels, however, that even with cannibalization, the company's sales will increase and the company will be better off. The following data are available. (in thousands) Current Results Proposed Results without Cannibalization Proposed Results with Cannibalization Sales revenue $45,000 $60,000 $50,000 Net income $12,000 $13,500 $12,000 Average total assets $100,000 $100,000 $100,000 (a)Discuss the implications that your findings have for Payton's decision. (Refer to the Broadening Your Perspective 9-6.) (b)Are there any other options that Payton should consider? What impact would each of these have on the above ratios? (30) The chapter presented some concerns regarding the current accounting standards for research and development expenditures. Assume that you are either (a) the president of a company that is very dependent on ongoing research and development, writing a memo to the FASB complaining about the current accounting standards regarding research and development, or (b) the FASB member defending the current standards regarding research and development. Your memo should address the following questions. (a)By requiring expensing of R&D, do you think companies will spend less on R&D? Why or why not? What are the possible implications for the competitiveness of U.S. companies? (b)If a company makes a commitment to spend money for R&D, it must believe it has future benefits. Shouldn't these costs therefore be capitalized just like the purchase of any long-lived asset that you believe will have future benefits? (31) Fresh Air Anti-Pollution Company is suffering declining sales of its principal product, nonbiodegradable plastic cartons. The president, Tyler Weber, instructs his controller, Robin Cain, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for $3.5 million in January 2014, was originally estimated to have a useful life of 8 years and a salvage value of $400,000. Depreciation has been recorded for 2 years on that basis. Tyler wants the estimated life changed to 12 years total and the straight-line method continued. Robin is hesitant to make the change, believing it is unethical to increase net income in this manner. Tyler says, \"Hey, the life is only an estimate, and I've heard that our competition uses a 12-year life on their production equipment.\" (a) Who are the stakeholders in this situation? (b) Is the proposed change in asset life unethical, or is it simply a good business practice by an astute president