MBA 601 Exam 2

In spring 2017, Parmac Engineering Company signed a $240 million contract with the city of Parkersburg, to construct a new city hall. Parmac expects to construct the building within two years and incur expenses of $180 million. The city of Parkersburg paid $60 million when the contract was signed, $120 million within the next six months, and the final $60 million exactly one year from the signing of the contract. Parmac incurred $72 million in costs during 2017 and rest in 2018 to complete the contract on time. Using the cost-to-cost method how much revenue should Parmac recognize in 2017?

$ 96 million

The Viennese Pastry Company sells pastries to Bavarian restaurants. On January 1, the company had accounts receivable of $400,000 and an Allowance for Uncollectible Accounts of negative $12,750 (i.e.: the bad debt expense in the prior period had been under estimated). During the year, the company had total credit sales of $1,000,000 and collected $950,000 of accounts receivable. Also during the year, the company wrote off $15,250 of bad debts. At year end, the company determined that the Allowance for Uncollectible Accounts should have a balance of positive $17,250. What amount should be added to the account to achieve the correct year-end balance in the Allowance for Uncollectible Accounts?

$(12,750) - $15,250 + X = $17,250; X = $45,250

On January 1, Promise Enterprises purchased the mining rights to a tract of land containing an estimated 160,000 tons of platinum for $1,300,000. The company estimated it would take 5 years to extract the platinum. During the year, the company extracted and sold 15,000 tons of platinum for $40,000. How much depletion cost should be recognized during the year by Promise Enterprises?

$1,300,000 × (15,000 / 160,000) = $121,875

Sheffield Company has the following asset account balances: Buildings and equipment $10,122,500 Accumulated depreciation 620,000 Patents 377,500 Goodwill 327,500 Accounts receivable 217,500 Land 2,507,500 What is the total amount that should be reported on the company's Balance Sheet under Property, Plant, & Equipment (net)?

$10,122,500 - $620,000 + $2,507,500 = $12,010,000

Belmont & Company has beginning inventory of $110,000, purchases of $530,000 and ending inventory is $71,000. What is the company's cost of goods sold?

$110,000 + $530,000 - $71,000 = $569,000

A business has net sales of $130,000, and an ending balance in accounts receivable of $13,500. What is the company's receivable turnover?

$130,000 /$13,500 = 9.63

Aiello Company incurred the following costs during the year: Research and development costs $112,000 Patent 22,500 Trademark 27,500 Marketing costs 40,000 Copyright 62,750 How much of these costs should be capitalized?

$22,500 + $27,500 + $62,750 = $112,750

Presto Pasta reported $72,500 as its ending inventory and $1,782,500 as cost of goods sold for Year 2. Its LIFO reserve totaled $62,500 and $43,500 for Year 2 and Year 1, respectively. The company's effective income tax rate was 36%. Sales amounted to $3,400,000 and other operating costs totaled $1,210,000 for Year 2. If Presto's had used FIFO instead of LIFO, how much would it have reported for gross profit during Year 2?

$3,400,000 - ($1,782,500 - ($62,500 - $43,500)) = $1,636,500

K&J Company reports ending inventory of $310,000 on a LIFO basis and also reports a LIFO inventory reserve of $58,000. If K&J had used FIFO instead than LIFO, what value should be assigned to K&J's ending inventory?

$310,000 + $58,000 = $368,000

Aashish Co. purchased equipment at the beginning of the year for $325,000 and began depreciating it over a 10-year period at $30,000 annually. The equipment's salvage value was $25,000. At the end of Year 4, Aashish Co. retooled its production line to increase its efficiency and incurred the following costs: Payment for internal labor $ 8,400 Materials and supplies $10,800 What is the book value of the equipment on January 1, Year 5?

$325,000 - ($30,000 × 4) + $8,400 + $10,800 = $224,200

On March 13, Cari's Cakery purchased equipment with an invoice cost of $39,000. The company paid 6.5% sales taxes on the invoice cost and an additional $275 to ship the equipment to the Cari's Cakery's production facilities. On March 28, Cari's Cakery hired an outside company to train its employees on the new equipment for a cost of $1,000. How much is the capitalized cost of the equipment for Cari's Cakery?

$39,000 + [$39,000 × 6.5%] + $275 + $1,000 = $42,810

Shifter Company reported $125,000 as its ending inventory and $2,025,000 as cost of goods sold for Year 2. Its LIFO reserve totaled $77,500 and $75,000 for Year 2 and Year 1, respectively. Sales amounted to $4,000,000 for Year 2. If the company had used FIFO instead of LIFO, how much would it have reported for gross profit during Year 2?

$4,000,000 - ($2,025,000 - ($77,500 - $75,000)) = $1,977,500

Madison, Inc. has the following asset account balances: Buildings and equipment $4,622,500 Accumulated depreciation 622,500 Patents 375,000 Goodwill 325,000 Accounts receivable 215,000 Land 2,507,500 What is the total amount that should reported on Madison, Inc.'s balance sheet under Property, plant, & equipment?

$4,622,500 + $2,507,500 - $622,500 = $6,507,500

The 2016 financial statements of Leggett & Platt, Inc. include the following information in a footnote. What are the company's current gross accounts and other receivables at the end of 2016? 2016 (in millions) Allowance for doubtful accounts $7.2 Total accounts and other receivables, net: $486.6 2015 Allowance for doubtful accounts: $9.3 Total accounts and other receivables, net: $520.2

$486.6 million + $7.2 million = $493.8 million

The 2016 financial statements of Leggett & Platt include the accounts receivable footnote: Total accounts and other receivables at December 31 consisted of the following: 2016 (in millions) Total accounts and other receivables: $493.8 Allowance for doubtful accounts: (7.2) Total accounts and other receivables, net: $486.6 2015 Total accounts and other receivables: $529.5 Allowance for doubtful accounts: (9.3) Total accounts and other receivables, net: $520.2 The balance sheet reports total assets of $2,984.1 million at December 31, 2016. The common-size amount for gross accounts and other receivables are: A) $486.6 million B) $493.8 million C) 16.5% D) 5.0% E) None of the above

$493.8 / $2,984.1 = 16.5%

Martin & Yoke obtained a patent for a new optical scanning device. The fees incurred to file for the patent and to defend the patent in court against several companies which challenged the patent amounted to $72,000. Martin & Yoke concluded that the expected economic life of the patent was 12 years, although its remaining legal life was 18 years. What amortization expense should be recorded in year two?

$72,000 / 12 = $6,000

Juno Company began exploration of oil in Alaska by paying $800,000 for the drilling rights on a large tract of land. The company drilled 11 oil wells on the land. Four of the wells were unsuccessful "dry" holes, but the other seven wells struck oil. Assume the company paid $65,000 each for the wells. In addition, the company paid $80,000 in other infrastructure costs associated with the drilling project. Calculate the capitalized cost of Juno Company's oil reserves using the successful efforts method.

$800,000 + $80,000 + ($65,000 x 7) = $1,335,000

A firm has accounts receivable of $190,000 and an existing positive balance of $1,800 in the Allowance for Uncollectible Accounts (i.e., the bad debt expense had been over estimated in the prior period). One half of the accounts receivable are current and one half is past due. The firm estimates that 2 percent of the current accounts and 5 percent of the past due accounts will prove to be uncollectible. Compute the bad debt expense for the current period using the aging method.

($190,000 x 50% x 2%) + ($190,000 x 50% x 5%) - $1,800 = $4,850

On January 1, the Wade Company purchased a new garbage truck for $195,000. The company estimated the truck's residual value to be $30,000, and that it could be used for 6,000 dumps. During Year 1, the truck completed 1,500 dumps. If the company uses units-of-production depreciation, how much is the book value of the truck at the end of Year 1?

($195,000 - $30,000 ) / (1,500 /6,000) = $41,250 Yr. 1 depreciation $195,000 - $41,250 = $153,750

Presto Pasta reported $72,500 as its ending inventory and $1,782,500 as cost of goods sold for Year 2. Its LIFO reserve totaled $62,500 and $43,500 for Year 2 and Year 1, respectively. The company's effective income tax rate was 36%. Sales amounted to $3,400,000 and other operating costs totaled $1,210,000 for Year 2. How much did Presto Pasta save in income taxes as a result of using LIFO to value its inventories during Year 2?

($62,500 - $43,500) × 36% = $6,840

On March 13, Cari's Cakery purchased equipment with an invoice cost of $39,000. The company paid 6.5% sales taxes on the invoice cost and an additional $275 to ship the equipment to the Cari's Cakery's production facilities. On March 28, Cari's Cakery hired an outside company to train its employees on the new equipment for a cost of $1,000. How much is the capitalized cost of the equipment for Cari's Cakery?

39,000 + [$39,000 × 6.5%] + $275 + $1,000 = $42,810

Hopewell Electronics maintains its LED television inventory using the perpetual method. The inventory records for April follow: Beginning inventory 20 units @ $525 each April 12 purchase 30 units @ $550 each April 20 sale 40 units @ $830 each April 25 purchase 15 units @ $575 each Using the weighted-average cost method, how much is Hopewell Electronics' cost of goods sold for April?

40 @ 540 = 21,600

Enviro purchased a patent from another company for $42,000. Although the patent has a remaining 15-year legal life, Enviro believes the patent will produce economic benefits over a maximum of 8 years. As an effect of recognizing amortization, how much will be reported on Enviro's income statement during the first year?

Annual expense: $42,000 / 8 = $5,250

Central Supply purchased a new printer for $72,000. The printer is expected to operate for ten (10) years, after which it will be sold for salvage value (estimated to be $7,200). How much is the first and second year's depreciation expense if the company uses the double-declining-balance method?

Answer: Depreciation base: Net book value = Cost - Accumulated depreciation Depreciation rate: 2 × straight-line rate (1 / useful life) = 2 × (1/10) = 2/10 Depreciation expense: Year 1 $72,000 × 2/10 = $14,400 Year 2 ($72,000 - $14,400) × 2/10 = $11,520

Aiello, Inc. had the following inventory in fiscal 2016. The company uses the FIFO method of accounting for inventory. Beginning Inventory, January 1, 2016: 130 units @ $15.00 Purchase 200 units @ $18.00 Purchase 50 units @ $13.50 Purchase 110 units @ $15.75 Ending Inventory, December 31, 2016: 120 units The company's cost of goods sold for fiscal 2016 is: A) $6,090.00 B) $6,045.00 C) $6,157.50 D) $5,305.75 E) None of the above The company's cost of goods sold for fiscal 2016 under LIFO is: A) $6,090.00 B) $1,800.00 C) $5,305.75 D) $6,157.50 E) None of the above

Answer: A Rationale: Costs of goods available for sale* $7,957.50 Less Ending Inventory (110 units @ $15.75) = 1,732.50 Less Ending Inventory (10 units @ $13.50) = 135.00 Cost of goods sold $6,090.00 *Cost of goods available for sale: (130 units × $15) + (200 units × $18) + (50 units × $13.50) + (110 units × $15.75) = $7,957.50 Answer: D Rationale: Costs of goods available for sale* $7,957.50 Less Ending Inventory (120 units @ $15) 1,800.00 Cost of goods sold $6,157.50

Central Supply purchased a new printer for $67,500. The printer is expected to operate for nine (9) years, after which it will be sold for salvage value (estimated to be $6,750). How much is the first year's depreciation expense if the company uses the double-declining-balance method? A) $15,000 B) $ 7,500 C) $18,000 D) $13,500 E) None of the above

Answer: A Rationale: Depreciation rate: 2 ×Straight-line rate (1/Useful life) = 2 × (1/9) Depreciation expense, Year 1: $67,500 × 2 x 1/9 = $15,000

The 2016 financial statements for Leggett & Platt, Inc., report the following information: Year ended December 31, (In millions) 2016 2015 Depreciation expense $86.8 $83.5 Property and equipment, net 565.5 540.8 Land 37.7 40.0 Accumulated depreciation 1,165.4 1,146.5 Which of the following estimates the property and equipment's percent-used-up at December 31, 2016? A) 68.8% B) 45.4% C) 16.9% D) 42.3% E) None of the above

Answer: A Rationale: Percent used up = Accumulated depreciation / Depreciable asset cost = $1,165.4 / ($565.5 + $1,165.4 - $37.7) = 68.8%

Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following does not occur on the company's financial statements? A) Bad debt expense is increased B) Accounts receivables (gross) is reduced C) Net income is reduced D) The allowance account is increased E) None of the above

Answer: B Rationale: Both bad debt and the allowance account are increased, resulting in lower NET accounts receivable and lower net income. The gross amount of receivables is unchanged.

The 2016 financial statement of Willamette Valley Vineyards reported Net revenues of $19,425,412 and Cost of goods sold of $7,204,884. Note 3 to the financial statements reported that Inventories consisted of: 2016 Winemaking and Packaging Materials: 817,836 Work-in-process: 6,634,014 Finished Goods: 4,518,806 Total Inventories: 11,970,656 2015 Winemaking and Packaging Materials: 690,292 Work-in-process: 6,058,701 Finished Goods: 3,883,469 Total Inventories: 10,632,462 The inventory turnover for 2016 was: A) 0.57 B) 0.64 C) 0.59 D) 1.71 E) None of the above

Answer: B Rationale: Inventory turnover = COGS / Average inventory = $7,204,884 / [($11,970,656 + $10,632,462) / 2] = 0.6374 = 0.64

EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all scooters. During 2017, the company recorded net sales of $1,900 million. Historically, about 4% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year EZ Wheels' balance sheet included an accrued warranty liability of $16.3 million and at the end of the year, the accrued warranty liability balance was $12.4 million. What was EZ Wheels Corporation's warranty expense for 2017? A) 12.4 million B) 22.8 million C) 76.0 million D) 26.7 million E) None of the above

Answer: B Rationale: $1,900 million x 4% x 30% = 22.8 million

Contingent Liabilities must have the following criteria - select all that apply. A) The obligation is certain to require payment at some point in the future. B) The obligation will probably require payment at some point in the future. C) The obligation is estimable. D) The obligation will possibly require payment at some point in the future. E) None of the above

Answer: B and C Rationale: Contingent liabilities are only included when the amount is probable and estimable. An obligation that is guaranteed at some point in the future is a liability, and one for which the liability is less than reasonably possible does not need to be reported.

Heller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $850,000, with a cost of merchandise to Heller of $340,000. Based on past experience, Heller Company expects 4% of sales to be returned. How much in net sales will Heller Company recognize for the current period? A) $850,000 B) $360,400 C) $816,000 D) $489,600 E) $510,000

Answer: C Rationale: $850,000 x 96% = $816,000

Which of the following would not require the company to record an accrual on the balance sheet? A) The company owes $43,000 in wages to its employees for the previous two weeks. B) Interest will be paid when a note payable matures in the following accounting period. C) Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. D) The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. E) None of the above

Answer: C Rationale: Based on management's belief, the lawsuit at hand can be deemed less than reasonably possible and therefore does not need to be disclosed in the financial statements.

The 2016 financial statements of BNSF Railway Company report total revenues of $19,829 million, accounts receivable of $1,272 million for 2016 and $1,198 million for 2015. The company's accounts receivable turnover for the year is: A) 17.0 times B) 8.9 times C) 16.1 times D) 17.9 times E) None of the above

Answer: C Rationale: Receivables turnover = Sales / Average AR = $19,829 / [($1,272 + $1,198) / 2] = 16.1 times per year.

Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $9 per ticket and receives $22 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $105. How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold? A) $9 because the $22 from the producer is similar to a negative cost of goods sold B) $105 because the $83 is cost of goods sold paid to the Blue Man Group producer C) $31 because both the fee from the customer and the Blue Man Group producer are earned D) $114 because the $83 is cost of goods sold paid to the Blue Man Group producer E) None of the above

Answer: C Rationale: Ticketmaster should record $31 revenue each time it sells a ticket. Of that, $9 will be received in cash and $22 will be recorded as receivable from the Blue Man Group producers.

Hauser Corporation has the following metrics for 2016. Days sales outstanding 36.5 Days payables outstanding 24.8 Days inventory outstanding 59.1 The cash conversion cycle for 2016 is: A) 2.2 days B) 61.3 days C) 47.4 days D) 70.8 days E) None of the above

Answer: D Rationale: Cash conversion cycle = Days sales outstanding + Days inventory outstanding - Days payable outstanding =36.5 days + 59.1 days - 24.8 days = 70.8 days

Fey Enterprises recorded a restructuring charge of $16.2 million during fiscal 2016 related entirely to the closing of its division located in Denver, Colorado. The company's financial statement footnotes indicated that expected employee separation payments amounted to $12.6 million and that fixed asset write-downs accounted for the remainder. Nickolas had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $2,700,000. The cash flow effect of Fey Enterprises' restructuring during fiscal 2016 is: A) $0 (there was no cash flow effect in 2016) B) $13,200,000 C) $16,800,000 D) $ 9,900,000 E) $21,600,000

Answer: D Rationale: The total restructuring charge accrued was $12.6 million because asset write-downs are not accrued. That is, there is no credit to a liability account for write-downs, the assets are credited (reduced). Thus, the company must have paid $12,600,000 - $2,700,000 = $9,900,000 in cash during fiscal 2016.

Apple Inc. and Microsoft Corporation are competitors in the computer industry. Following is a table of Total revenue and R&D expenses for both companies. Apple 2016 Total Revenue: $215,639 R&D Expenses: $10,045 2015 Total Revenue: $233,715 R&D Expenses: $8,067 2014 Total Revenue: $182,795 R&D Expenses: $6,041 Microsoft 2016 Total Revenue: $85,320 R&D Expenses: $11,988 2015 Total Revenue: $93,580 R&D Expenses: $12,046 2014 Total Revenue: $86,833 R&D Expenses: $11,381 Which of the following is true? A) Apple Inc. is the more R&D intensive company of the two. B) Apple Inc. has become less R&D intensive over the three years. C) Microsoft Corporation is less R&D intensive in 2016 than in 2015. D) Microsoft Corporation is more R&D intensive in 2016 than in 2015. E) None of the above

Answer: D Rationale: To make comparisons, we need to determine the common size amount for the R&D expenditures of both firms by scaling by total revenues. Microsoft Corporation spends proportionately more on R&D than Apple Inc. Microsoft Corporation is more R&D intensive thus, (A) is not true. Apple Inc. has spent more on R&D (and increased the percentage spent) in 2016 than in 2015 and 2014, thus, (B) is not true. Microsoft Corporation increased R&D from 12.87%% in 2015 to 14.05% in 2016, thus (D) is true, but not (C).

Which of the following items creates complications related to revenue recognition? A) Bonuses tied to sales goals B) Long-term construction contracts C) Multiple element sales contracts D) Consignment goods E) All of the above

Answer: E Rationale: Each of these types of revenue or business conditions creates risk associated with revenue recognition. Each requires good internal controls to prevent and detect inappropriate revenue recognition, as well as extra management vigilance and auditor care.

Farm Equipment Company had goodwill valued at $170 million on its balance sheet at year-end. A review of the goodwill by the company's CFO indicated that the goodwill was impaired and was now only worth $100 million. How will the goodwill impairment appear on the Income Statement of the company?

As an Impairment Loss of $70 million

How do fixed assets differ from intangible assets?

Assets have physical existence, while intangibles have no physical existence

The 2017 Form 10-K of Oracle Corporation, for the May 31, 2017 year-end, included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $327 million, accounts written off during the year of $137 million, balance in allowance at the end of the year $319 million. What did Oracle Corporation report as bad debt expense for the year?

Balance in allowance at the beginning of the year + Bad debt expense - Accounts written off during the year = Balance in allowance at the end of the year. Bad debt expense = $319 million - $327 million + $137 million = $129 million.

Which one of the following statements is not true about inventory management systems?

Both periodic and perpetual inventory systems track the inventory cost in the inventory account on a continuing basis.

How might managers that use LIFO manipulate income?

By drawing down on the LIFO earnings reserve when additional income is needed to meet Wall Street expectations

Impairments of plant assets are recorded as a consequence of which accounting principle?

Conservatism

Which accounting principle is reflected in the application of LCM?

Conservatism

How does the weighted-average cost method differ from the average cost method?

Each inventory price is weighted by the quantity of units purchased at a given price with the weighted-average cost method.

Fantastic Frames provided the following information regarding its LIFO perpetual inventory for the month of August: Beginning inventory of poster frames 1,300 @ $15.10 August 5 Sale 1,200 @ $45.00 August 13 Purchase 700 @ $17.40 August 22 Sale 600 @ $45.00 Units on hand at the end at August 31 200 At August 1, Fantastic Frames' LIFO inventory reserve was reported at $220. How much should Fantastic Frames report as its LIFO reserve at August 31?

Ending inventory FIFO = 200 @ $17.40 = $3,480 Ending inventory LIFO = (100 @ $15.10) + (100 @ $17.40) = $3,250 $3,480 - $3,250 = $230

Fantastic Frames provided the following information regarding its LIFO perpetual inventory for the month of August: Beginning inventory of poster frames: 1,300 @ $15.10 August 5 Sale: 1,200 @ $45.00 August 13 Purchase: 700 @ $17.40 August 22 Sale: 600 @ $45.00 Units on hand at the end at August 31: 200 At August 1, Fantastic Frames' LIFO inventory reserve was reported at $220. How much should Fantastic Frames report as its LIFO reserve at August 31?

Ending inventory FIFO = 200 @ $17.40 = $3,480 Ending inventory LIFO = (100 @ $15.10) + (100 @ $17.40) = $3,250 $3,480 - $3,250 = $230

Which inventory costing method results in the highest net income during a period of rising unit prices?

FIFO

True/False: The market rate of interest is equal to the risk-free rate plus a credit-rating premium.

False, The market rate of interest is usually defined as the yield on U.S. Government borrowings such as treasury bills, notes, and bonds, called the risk-free rate, plus a spread (also called a risk premium).

Hillside Garden Co. uses the aging method in accounting for uncollectible accounts. On March 16, Hillside Garden Co. wrote off an uncollectible account in the amount of $1,300. What effect does the write off have on the company's financial statements?

Increases and decreases assets by the same amount, $1,300

Which of the following statements is true? Goodwill is subject to amortization. Research and development costs may be capitalized to the balance sheet. Intangible assets are amortized to expense on the income statement. Goodwill arises because of a company's positive corporate image among its customers.

Intangible assets are amortized to expense on the income statement.

Which one of the following is true concerning the operating cycle of a retail operation?

It is the time it takes a company to buy inventory, sell to customers, and collect the cash.

In a period of declining prices, which inventory-costing method results in the highest net income?

LIFO

Which inventory costing method assumes that the most recently purchased merchandise is sold first?

LIFO

Which inventory costing method generates the largest cost of goods sold in periods of rising prices?

LIFO

The 2016 financial statements of Willamette Valley Vineyards, Inc. include the following footnote: Note 4. Property and Equipment 2016 2015 Construction in progress $ 449,409 $482,284 Land 8,063,716 5,089,472 Winery buildings 14,458,309 13,756,320 Equipment 10,122,593 9,055,987 = 33,094,027 28,384,063 Less accumulated depreciation (12,897,082) (11,654,901) = $20,196,945 16,729,162 Depreciation expense $ 1,254,455 $ 1,194,191 The average useful life of Willamette's depreciable assets at the end of fiscal 2016 is: A) 14.2 years B) 19.6 years C) 2.4 years D) 21.7 years E) None of the above

Rationale: Average useful life = Depreciable asset cost / Depreciation expense = ($33,094,027 - $449,409 - $8,063,716) / $1,254,455 = 19.59 = 19.6 years.

Phil's is a sports bar in Chicago. During the Super Bowl football game, one of the customers punched a hole in the wall when his favorite team fumbled the ball. Phil's paid $275 to repair the hole. How should Phil's account for the cost of repair?

Recognize the cost as repair and maintenance expense

On July 31, Electronics Direct sold a 65 inch interactive LED television to a customer for $4,550. The television had a cost basis of $2,275. The customer is required to make a $500 down payment and to pay the $4,050 balance in equal $90 payments over the next 45 months on the last day of each month. Under the installment method of revenue recognition, how much gross profit will the company recognize during the current year?

Revenue = Down payment ($500) + Monthly payments (5 x $90) =$950 Cost of goods sold = $950 / $4,550 × $2,275 = $475 Gross profit = $950 - $475 = $475

The records of Supplies Plus Company showed the following information about a delivery truck purchased for $34,250: Accumulated depreciation at December 31, Year 3 $12,000 Depreciation for the first six months of Year 4 $2,000 On July 1, Year 4, the machine was sold for $18,600. How much is the gain or loss on disposal?

Selling price $18,600 Less book value [$34,250 - ($12,000 + $2,000)] =(20,250) Gain / (loss) $(1,650)

If a company sells on the installment basis which allows a customer to pay monthly payments, the company:

Should use the installment method of revenue recognition if account payment is uncertain

On January 1, DuPage Company purchased a delivery truck for $30,000. The company estimates the truck will be driven 80,000 miles over its eight-year useful life. The estimated salvage value is $6,000. The truck was driven 12,000 miles in the first year. Which method results in the largest depreciation expense in year one?

Straight-line: ($30,000 - $6,000)/8 = $3,000 Double-declining: $30,000 x 2/8 = $7,500 Units-of-production: ($30,000 - $6,000) x 12,000/80,000 = $3,600 Sum-of-the-years' digits: ($30,000 - $6,000) x 8/36 = $5,333.

A partial balance sheet for Findlay Company appears below. Cash: 427,500 AR, net of allowance of $2,950: 282500 Which one of the following statements is true concerning the company's accounts receivable as of December 31?

The company expects to collect $285,450 from its customers.

Why might a company establish a special purpose entity (SPE) instead of pledging accounts receivable?

The company's leverage does not increase.

Which one of the following is true concerning natural resource costs? They include patents and oil and gas reserves. The costs of acquisition and development are allocated as depletion over the expected productive life. The costs are depleted using MACRS. The costs of acquiring natural resources are reported as an expense in the period incurred.

The costs of acquisition and development are allocated as depletion over the expected productive life.

Tristate Power Corp. sold merchandise to a customer on credit for $4,000 with credit terms of 1/10, n/30. The invoice was dated June14. Which one of the following statements is true?

The customer must pay $4,000 if paid after June 24.

The direct write-off method is not generally accepted because:

The method fails to match sales revenue with expenses in the appropriate time period.

Companies which provide services over extended periods of time may recognize revenue as work is completed. The proration of revenue over multiple fiscal periods is called:

The percentage-of-completion method

Why is depreciation expense recognized?

To match the cost of the asset against revenue using a reasonable allocation method

True/False: Credit ratings are an opinion of a company's relative default risk.

True, The credit rating agencies provide an assessment of their view of the likelihood that a company will default on its debt obligations.

The Parkersburg Company purchased an office building for $2,277,500. The building had an estimated useful life of 25 years and an expected salvage value of $275,000. What is the depreciation expense for year two using the double-declining balance method?

Yr. 1: $2,277,500 x 2/25 = $182,200 Yr. 2: ($2,277,500 - $182,200) x 2/25 = $167,624

On January 1, Delaney Company purchased a delivery truck for $46,000, having a salvage value of $4,000, and an estimated useful life of 4 years. Calculate the depreciation expense in Year 2 assuming the use of the double-declining balance method.

Yr. 1: $46,000 x 2/4 = $23,000 Yr. 2: ($46,000 - $23,000) x 2/4 = $11,500

Findlay & Company purchased a truck from a company going out of business for $65,000. An appraisal indicated the fair value of the truck to be $70,000. Findlay estimated the truck would provide future benefits for 5 years and would bring $6,000 residual value at the end of the 5-year period. How much is the depreciation expense for the second year if the company uses the double-declining-balance method?

Yr. 1: $65,000 x 2/5 = $26,000 Yr. 2: ($65,000 - $26,000) x 2/5 = $15,600

On January 1, Landfill Management purchased a new garbage truck for $205,600. Landfill Management estimated the truck's residual value to be $34,000, and that it could be used for 6,600 dumps. During Year 1, the truck completed 1,200 dumps. If Landfill Management uses units-of-production depreciation, how much is the book value of the truck at the end of Year 1?

[$205,600 - $34,000] / 6,600 = $26 per dump Depreciation = $26 × 1,200 = $31,200 Book value = $205,600 - $31,200 = $174,400

Flossmoor Company acquired a truck that cost $210,000. The company estimated it could sell the truck for $42,000 at the end of its estimated useful life of 5 years. How much is the gain or loss on the sale if straight-line depreciation is used and the asset is sold for $109,200 on December 31, Year 3?

[($210,000 - $42,000) / 5] x 3 years = $100,800 $210,000 - $100,800 = $109,200 book value at year-end of Year 3.

Rice Contractors began a contract to build a new student union on the Southern State University campus during Year 1 for $910,000. Information concerning the project follows: Year 1 % work completed: 25% Cost Incurred: 172,000 Progress Billings: 160,000 Cash Collected: 130,000 Year 2 % work completed: 35% Cost Incurred: 248,000 Progress Billings: 360,000 Cash Collected: 340,000 Year 3 % work completed: 40% Cost Incurred: 180,000 Progress Billings: 380,000 Cash Collected: 430,000 How much is the balance of the Unbilled Accounts Receivable account at the end of Year 1 if Rice Contractors uses the percentage of completion method?

[25% x $910,000] - $160,000 = $67,500

The 2016 income statements of Leggett & Platt, Inc. reports net sales of $3,749.9 million. The balance sheet reports accounts receivable, net of $486.6 million at December 31, 2016 and $520.2 million at December 31, 2015. The days sales outstanding in 2016 was: A) 49 days B) 10 days C) 44 days D) 8 days E) None of the above

[365 x (($486.6 + $520.2)/2)] / $3,749.9 = 49 days

Identify when each of the following companies should recognize revenue. a. Valero Energy - integrated petroleum company that sells crude oil, natural gas and petroleum and chemical products under short-term agreements at prevailing market prices b. Boeing - airplane manufacturer whose revenue is derived largely from long-term fixed-price contracts with airlines c. Wells Fargo - large commercial bank that earns interest on loans d. Ford Motor Company - manufactures and retails automobiles, provides financing for dealers and customers

a. Valero: revenues are recognized when the products are delivered, which occurs when the gas station owner (for independent stations) or the retail customer (for company owned locations) has taken delivery of the gasoline. b. Boeing: Record revenue using cost-to-cost method. c. Wells Fargo: Interest is earned by the passage of time. If cash is not received, Wells Fargo accrues income on its loans and establishes an account receivable on its balance sheet. d. Ford Motor Company: Retail revenue recorded when customer takes delivery of the automobile. Sales that are financed will yield interest revenue over the life of the note. This is similar to how banks earn revenue.

Indigo Partners, LLC, the parent company of Frontier Airlines, correctly recognizes revenue for air travel at the point in time when:

Flight service is concluded

The Aiello Company began operations on June 1 and made the following inventory purchases in June: June 1: 150 units @ $990 June 10: 200 units @ $1,620 June 15: 200 units @ $1,680 June 28: 150 units @ 1,275 $5,565 A physical count of merchandise inventory on June 30 reveals that there are 300 units on hand. Using the FIFO inventory method, what is the cost of goods sold for June?

$1,275 + [($1680 / 200) x 150] = $2,535

Hannah & Company had the following transactions: April 1, Beginning Inventory: 20 units @ $115 each = $2,300 April 10, Purchase: 10 units @ $137 each = $1,370 April 20, Purchase: 10 units @ $135 each = $1,350 April 25, Sales of inventory 25 units @ $410 What is the company's cost of goods sold using LIFO?

$1,350 + $1,370 + (5 x $115) = $3,295

Hannah & Company has been selling laptops for $500 each that had cost $252. By year end, the replacement cost of the laptops had declined to $207, and consequently, the company decided to reduce its selling price to $450. At what value should the company's inventory of laptops be valued at on December 31, its year end?

$207

The Bullock Company sold a building for $225,000 that had a book value of $250,000. The building had originally cost the company $6,000,000 and had accumulated depreciation to date of $5,750,000. What is the gain or loss that the Bullock Company incurred on this transaction?

$250,000 - $225,000 = $25,000

Ice Company has net sales of $250,000, and an ending balance in accounts receivable of $30,000. What is the company's receivable turnover?

$250,000 / $30,000 = 8.33

A business has a receivable turnover of 7. What is the company's receivable collection period?

365 / 7 = 52.14

The following information is taken from the annual report of West Suburban Industries: Net Sales Year 2: 73,350 Year 1: 67,600 Accounts Receivable, net Year 2: 9,000 Year 1: 8,200 What is the receivable collection period for Year 2?

365 / [$293,400 / $40,400] = 50.3

Rice Contractors began a contract to build a new student union on the Southern State University campus during Year 1 for $910,000. Information concerning the project follows: Year 1 % work completed: 25% Cost Incurred: 172,000 Progress Billings: 160,000 Cash Collected: 130,000 Year 2 % work completed: 35% Cost Incurred: 248,000 Progress Billings: 360,000 Cash Collected: 340,000 Year 3 % work completed: 40% Cost Incurred: 180,000 Progress Billings: 380,000 Cash Collected: 430,000 How much revenue should Rice Contractors recognize during Year 1 if Rice uses the percentage of completion method?

Revenue = 25% x $910,000 = $227,500

Which inventory costing method is expensive to implement?

Specific identification

On June 30, Electronics Direct sold an interactive LED television to a customer for $5,100. The television had a cost basis of $3,800. The customer is required to make a $700 down payment and to pay the $4,400 balance in equal $220 payments over the next 20 months on the last day of each month. The company uses the installment method of revenue recognition. What is the company's opportunity cost over the 20 months assuming an annual 6% cost of borrowing? The present value factor for 20 periods at 6% is 11.46992.

$4,400 - ($220 x 11.46992) = $1,87

On June 30, Electronics Direct sold an interactive LED television to a customer for $5,100. The television had a cost basis of $3,800. The customer is required to make a $700 down payment and to pay the $4,400 balance in equal $220 payments over the next 20 months on the last day of each month. The company uses the installment method of revenue recognition. What is the company's opportunity cost over the 20 months assuming an annual 6% cost of borrowing? The present value factor for 20 periods at 6% is 11.46992.

$4,400 - ($220 x 11.46992) = $1,877

Pet Treats, Inc. incurred the following costs during the year: An addition was added to the building at a cost of $72,000. To allow an improved flow of production, a new conveyor system was installed at a cost of $8,250. To allow better handling of large loads, a hydraulic lift system was installed on a truck at a cost of $6,750. The truck's engine was repaired at a cost of $2,250. The repairs did not increase the efficiency or extend the truck's life beyond its original estimated life. How much is considered to be 'betterment expenditures'?

$72,000 + $8,250 + $6,750 = $87,000

Byrnmar Company had the following transactions: April 1, Beginning Inventory: 20 units @ $205 each = $4,100 April 10, Purchase: 10 units @ $227 each = $2,270 April 20, Purchase: 10 units @ $221 each = $2,210 April 25, Sales of inventory 40 units @ $600 What is value of the company's ending inventory using LIFO?

-0-

The following costs related to the purchase of production equipment were incurred by Barco, Inc. Which item is capitalized? Interest costs incurred to finance the equipment over its five-year useful life Depreciation costs during the first year of life Transportation charges to deliver the equipment to Barco, Inc. Maintenance expenditures during the first year of equipment use

...

Which of the following are considered limitations of the percentage-of-credit-sales method? 1. It fails to recognize future credit losses in the same period the related revenue is earned. 2. It fails to capture the changing payment patterns of customers in a timely manner. 3. It lacks the estimation precision provided by the aging method.

2 and 3 are limitations

Mullen Corporation had the following transactions: April 1, Beginning Inventory: 20 units @ $115 each = $2,300 April 10, Purchase: 10 units @ $139 each = $1,390 April 20, Purchase: 10 units @ $135 each = $1,350 April 25, Sales of inventory 25 units @ $410 What is the company's cost of goods sold using weighted-average cost?

25 @ 126 = $3150

On July 31, Big Box Store sold a flat screen television to a customer for $1,250. The television had a cost basis of $550. The customer is required to make a $275 down payment and to pay the $975 balance in equal $25 payments over the next 39 months on the last day of each month. Under the installment method of revenue recognition, how much gross profit will the company recognize during the year?

Revenue = Down payment ($275) + Monthly payments (5 x $25) = $400 Cost of goods sold = $400 / $1,250 × $550 = $176 Gross profit = $400 - $176 = $224

A company that uses LIFO for income tax purposes must:

Use LIFO when reporting its audited financial statements to shareholders

Accounts receivable for Bright Co. totaled $16,000 and the Allowance for Uncollectible Accounts balance was $70 at year end after write offs but before recording the year-end estimate of uncollectible accounts. Bright Co. wrote off $490 of uncollectible accounts during the year. Management estimated that 2.75% of its net sales of $18,000 would not be collected. Compute the bad debt expense for the year using the percentage-of-credit sales method.

$18,000 × 2.75% = $495

The Parkersburg Company purchased an office building for $2,277,500. The building had an estimated useful life of 25 years and an expected salvage value of $275,000. What is the depreciation expense for year two using the straight-line method?

$2,277,500 - $275,000 / 25 = $80,100

Pullman Company reported the following information in its recent annual report: Year 1 Cost of goods sold: $2,000,000 Beginning inventory: $450,000 Ending inventory: $430,000 Year 2 Cost of goods sold: $2,325,000 Beginning inventory: $430,000 Ending inventory: 350,000 What is the company's inventory turnover for Year 2?

$2,325,000 / $350,000 = 6.64

On January 1, Michaelene Company purchased equipment with an invoice cost of $216,000. The company paid 8% sales taxes on the invoice cost and an additional $1,000 to ship the equipment to the company's facilities. On January 15, the company hired an outside company to train its employees on the new equipment at a cost of $2,400. How much is the capitalized cost of the equipment?

$216,000 + ($216,000 x 0.08) + $1,000 + $2,400 = $236,680

Waste Disposal, Inc. provided the following information concerning its accounting records: Sales revenue (all on account): $362,500 Accounts receivable, gross January 1: 23,500 Allowance for uncollectible accounts, January 1: 1,350 Collections from customers during the year: 358,500 Accounts written off as uncollectible during the year: 1,100 How much is the balance of the Accounts Receivable, gross account at December 31?

$23,500 + $362,500 - $358,500 - $1,100 = $26,400

The Whirlwind Soccer Team sells season tickets and collects the cash in January at the beginning of the season. The team collected $52,500 for season tickets. The soccer season starts in February and the season tickets are for 15 games. In February, the team played 3 games. How much revenue should be recorded for February?

$52,500 / 15 games = $3,500 per game x 3 games = $10,500

Accounts receivable for the Clyborn Company totaled $41,000 and the Allowance for Uncollectible Accounts balance was positive $570 at year end after write offs (i.e., the bad debt expense had been over estimated in the prior period) but before recording the year-end estimate of uncollectible accounts. The company wrote off $490 of uncollectible accounts during the year. Management estimated that 3% of its net credit sales of $55,000 would not be collected. Compute the bad debt expense for the year using the percentage-of-credit-sales method.

$55,000 x 3% = $1,650

On June 30, Motorsports, Inc. sold an ATV (all-terrain vehicle) to a customer for $6,450. The ATV had a cost basis of $5,200 to Motorsports. The customer is required to make a $430 down payment and to pay the $6,020 balance in equal $430 payments over the next 14 months on the last day of each month. Under point-of-sale revenue recognition, how much gross profit will Motorsports recognize during the year?

$6,450 - $5,200 = $1,250

The following information is taken from the annual report of Hohmeyer Industries: Net Sales Year 2: 73,350 Year 1: 67,600 Accounts Receivable, net Year 2: 9,000 Year 1: 8,200 How much is the accounts receivable turnover ratio for Year 2?

$73,350 / $9,000 = 8.15

On June 16, Kitchen Cabinets Co. sold merchandise to a customer on credit for $90,000 with credit terms of 2/10, n/30. The cost of the merchandise to Kitchen Cabinets Co. totaled $50,000. How much is net sales if the customer pays on June 24?

$90,000 - [$90,000 × 0.02] = $88,200

The Aiello Company began operations on June 1 and made the following inventory purchases in June: June 1: 150 units @ $990 June 10: 200 units @ 1,620 June 15: 200 units @ 1,680 June 28: 150 units @ 1,275 = $5,565 A physical count of inventory on June 30 revealed that there are 300 units on hand. Using the LIFO inventory method, what is the value of the ending inventory on June 30?

$990 + [($1,620 / 200) x 150] = $2,205

The ending inventory for Wireless Central's midtown store contained 150 smartphones at a cost of $116 each and 240 smartphones at a cost of $130 each. Wireless Central planned to sell them for $150 each. What is the company's phantom profit if a LIFO liquidation occurs?

($130 - $116) × 150 = $2,100

Dempster Company performs an aging analysis to determine the amount of its bad debts expense to record at the end of each year. At the end of the current year, Dempster's aging schedule appeared as follows: Current Receivables: 24,000 at 1 % Past Due Receivables 1-30 Days: 5300 at 2% 31-60 Days: 8100 at 6% 61-90 Days: 1960 at 25% 91+ Days: 1260 at 40% The balance in Dempster's Allowance for Doubtful Accounts was $520 negative (i.e., the bad debt expense in the prior period had been under estimated). What is the amount of Dempster's bad debt expense for the year?

($24,000 x 0.01) + ($5,300 x 0.02) + ($8,100 x 0.06) + ($1,960 x 0.25) + ($1,260 x 0.40) = $1,826 estimated uncollectible accounts. $1,826 - $(520) = $2,346 bad debt expense for the year.

Hohmeyer Company performs an aging analysis to determine the amount of its bad debt expense to record at the end of each year. At the end of the current year, Hohmeyer's aging schedule appeared as follows: Current Receivables: 31,000 at 1 % Past Due Receivables 1-30 Days: 3400 at 2% 31-60 Days: 6400 at 6% 61-90 Days: 1800 at 25% 91+ Days: 1200 at 40% The balance in Hohmeyer's Allowance for Uncollectible Accounts was $400 positive (i.e., the bad debt expense had been over estimated in the prior period). Based on the aging information, what is the amount of accounts receivable that Hohmeyer estimates that it will not collect?

($31,000 x 0.01) + ($3,400 x 0.02) + ($6,400 x 0.06) + ($1,800 x 0.25) + ($1,200 x 0.40) = $1,692

Bluerock & Company has accounts receivable of $66,000 and an existing positive balance of $500 in the Allowance for Uncollectible Accounts (i.e., the bad debt expense had been over estimated in the prior period). Two thirds of the accounts receivable are current and one third is past due. The firm estimates that 2 percent of the current accounts and 5 percent of the past due accounts will prove to be uncollectible. Compute the bad debt expense for the current period using the aging method.

($66,000 x 2/3 x 2%) + ($66,000 x 1/3 x 5%) - $500 = $1,480

Campus Supplies maintains its hand-held graphing calculator inventory using the perpetual inventory method. The inventory records for May follow: Beginning Inventory: 20 units @ $105 each May 12 Purchase: 30 units @ $110 each May 20 Sale: 40 units @ $195 each May 25 Purchase: 15 units @ $115 each Using the weighted-average cost method, how much will Campus Supplies report as gross profit for May?

(40 × $195) - (40 × $108) = $3,480

Campus Supplies maintains its hand-held graphing calculator inventory using the perpetual inventory method. The inventory records for May follow: Beginning inventory ................. 20 units @ $105 each May 12 purchase ............... 30 units @ $110 each May 20 sale ....................... 40 units @ $195 each May 25 purchase ............... 15 units @ $115 each Using the weighted-average cost method, how much will Campus Supplies report as gross profit for May?

(40 × $195) - (40 × $108) = $3,480

The Truffle Company maintains its inventory using the perpetual inventory method. The inventory records for June follow: Beginning inventory: 60 units @ $15 each June 11 purchase: 60 units @ $16 each June 29 sale: 75 units @ $36 each Using the LIFO inventory-costing method, how much will the company report as ending inventory at June 30?

(45 x $15) = $675

The Truffle Company maintains its inventory using the perpetual method. The inventory records for June follow: Beginning inventory 60 units @ $15 each June 11 purchase 60 units @ $16 each June 29 sale 75 units @ $36 each Using the FIFO inventory-costing method, how much will the company report as cost of goods sold for June?

(60 X $15) + (15 x $16) = $1,140

The Truffle Company maintains its inventory using the perpetual method. The inventory records for June follow: Beginning inventory 60 units @ $15 each June 11 purchase 60 units @ $16 each June 29 sale 75 units @ $36 each Using the FIFO inventory-costing method, how much will the company report as cost of goods sold for June?

(60 X $15) + (15 x $16) = $1,140

Hannah & Company has been selling laptops for $500 each that had cost $252. By year end, the replacement cost of the laptops had declined to $207, and consequently, the company decided to reduce its selling price to $450. At what value should the company's inventory of laptops be valued at on December 31, its year end?

207

Campus Supplies maintains its hand-held graphing calculator inventory using the perpetual inventory method. The inventory records for January follow: Beginning inventory ................. 20 units @ $105 each January 12 purchase ............... 30 units @ $110 each January 20 sale ....................... 40 units @ $195 each January 25 purchase ............... 15 units @ $115 each Using the weighted-average cost method, how much is the January 31 inventory on Campus Supplies' balance sheet?

25 @ $112.20 = $2,805

Mullen Corporation had the following transactions: April 1, Beginning Inventory: 20 units @ $115 each = $2,300 April 10, Purchase: 10 units @ $139 each = $1,390 April 20, Purchase: 10 units @ $135 each = $1,350 April 25, Sales of inventory 25 units @ $410 What is the company's cost of goods sold using weighted-average cost?

25 @ $126 = $3,150

Precise Pens maintains its mechanical pencil inventory using the perpetual inventory method. The inventory records for November follow: Beginning inventory: 40 units @ $10.10 each November 13 purchase: 60 units @ $10.60 each November 26 sale: 75 units @ $18 each Using the LIFO inventory-costing method, how much will Precise Pens report as ending inventory at November 30?

25 @ 10.10 = 252.50

Lumos & Company disclosed the following information in its recent annual report: Year 1 Cost of goods sold: $8,000,000 Beginning inventory: $1,000,000 Ending Inventory: $2,000,000 Year 2 Cost of goods sold: $10,050,000 Beginning inventory: $2,000,000 Ending inventory: $2,550,000 What is the company's inventory-on-hand period for Year 2?

365 / ($10,050,000 /$ 2,550,000) = 92.61

Manfred Company received a purchase order for goods it had in stock in December. The customer has asked Manfred to hold the goods for several months until it is ready for them. Can Manfred recognize revenue in December?

No,because delivery has not taken place

Which inventory costing method does not require the use of the Lower-of-cost-or-market method?

All methods require the use of LCM

The Truffle Bear Corporation earned rental revenue of $250,000 in December, of which $150,000 was collected. The remainder will not be received until January. What is the effect of this transaction on the accounting equation?

Assets Increase and Shareholders' Equity Increase

If a company uses the LIFO method on its federal income tax return, then it

Must use LIFO on its financial statements