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To receive points for correct answers, all work must be shown - if no work is shown, points will not be awarded for correct answers. Please label clearly your answers for each question.
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Problem 1 Hummus Company began operations on January 1, Year 1. Selected ending balances for Year 1 are: Accounts receivable, $6,600 Allowance for doubtful accounts, $820 Hummus Company experienced the following events during Year 2: Earned $250,000 of revenue on account Collected $185,000 cash from accounts receivable Paid in advance a one-year lease for office rent, $15,000; rental period began May 1, Year 2 Salary expense was $55,000, of which $50,000 had been paid at the end of Year 2 Operating expenses were $110,000, of which $90,000 had been paid at the end of Year 2 Wrote off $3,000 of uncollectible accounts Adjusted the accounting records to reflect managements belief that 3% of sales on account will be uncollectible. Hummus Company uses the allowance method for accounting for bad debts. Collected $500 from accounts that had been previously written off
Question 1 What is Hummus Companys net income for Year 2?
Question 2 What is the net realizable value that Hummus Company will report on its Year 2 balance sheet (after all adjusting entries have been made)?
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Problem 2 Whitewater Company purchased a piece of new machinery to use in its business. The details of the purchase and related costs are as follows:
Purchase price of machinery $190,000
Sales tax of machinery $11,000
Installation of machinery $3,000
Salvage value $12,000
Annual salary of new employee hired to operate machinery $50,000
Increase in annual cost of fire and theft insurance to cover
New machinery $6,000
Estimated useful life of machinery 10 years
Question 3 Assume that Whitewater sells the machinery at the end of year 4 for $132,000. What is the gain or loss Whitewater would recognize on the sale of the machinery?
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