Module 5 homework
Bourne Company (a fictional company) has the following inventory note in its 20X3 annual report. LIFO revaluations decreased $140 million in 20X3, compared with decreases of $169 million in 20X2 and $82 million in 20X1. Included in these changes were decreases of $30 million, $12 million, and $3 million in 20X3, 20X2, and 20X1, respectively, that resulted from lower LIFO inventory levels. There were net cost decreases in each of the last three years. Bourne's earnings before income taxes were $20.0 billion in 20X3. Assume a 21% marginal tax rate. 1. What are the total cumulative tax savings as of December 31, 20X3, that Bourne has realized as a result of using the LIFO inventory method? 2. What would Bourne's pre-tax earnings have been in 20X3 if it had been using FIFO? 3. What December 31, 20X3, balance sheet amounts would be different—and by how much—if Bourne had used FIFO to account for its inventories? 4. What were the LIFO liquidation profits reported in 20X3 both pre-tax and after-tax?
1. Total cumulative tax savings= $88.20 2. Pre-tax earnings= $19,860 3. Inventory= $420 higher. Retained earnings= $331.8 higher. Cash= $88.2 lower 4. Pre-tax profits= $30. After-tax profits= $23.7
Needham Corporation has a $200,000 balloon mortgage payment due in early August. To meet its obligation, it decided on August 1 to accelerate collection of accounts receivable by assigning $260,000 of specified accounts to a commercial lender as collateral for a loan. Under the agreement, Needham guarantees the accounts and will notify its customers to make their payments directly to the lender. In return, the lender advances to Needham 85% of the accounts assigned. The remaining 15% will be paid to Needham once the commercial lender has recovered its fees and related cash advances. The lender receives a fee of 5% of the total accounts assigned, which is immediately deducted from the initial cash advance. The lender also assesses a monthly finance charge of one-half of 1% on any uncollected balances. Finance charges are to be deducted from the first payment due Needham after the lender has recovered its cash advances. On August 31, Needham received a statement from the lender saying it had collected $160,000. On September 30, Needham received a check from the lender with a second statement saying it has collected an additional $80,000. 1. Prepare all necessary journal entries made by Needham. 2. Show the balance sheet presentation of the assigned accounts receivable and any related liabilities at August 31. 3. Prepare all necessary journal entries made by Needham assuming these changes in the given scenario: A. The transaction qualifies under U.S. GAAP as a sale with recourse. B. The assessed monthly finance charge increases the Loss on sale of receivables account and is offset by a credit to Due from factor. C. Although Needham has guaranteed the transferred accounts, their high quality makes nonpayment unlikely.
1. 8/1 Debit cash $208,000. Credit Interest expense $13,000 and loan payable $221,000. 8/31 Debit loan payable $160,000. Credit AR $160,000 8/31 Debit Interest expense $500. Credit Interest payable $500. 9/30 Debit loan payable $61,000, interest payable $500, cash $18,400, interest expense $100. Credit AR $80,0000 2. Balance sheet account balances: AR= $100,000. Loan payable= $61,000. Interest payable= $500 3. 8/1 Debit cash $208,000, due from factor $39,000, and loss on sale of receivable $13,000. Credit AR $260,000. 8/31 Debit Loss on sale of receivables $500. Credit due from factor $500. 9/30 Debit loss on sale of receivables $100 and cash $18,400. Credit due from factor $18,500.
KW Steel Corp. uses the LIFO method of inventory valuation. Waretown Steel, KW's major competitor, instead uses the FIFO method. The following are excerpts from each company's 20X1 financial statements: 1. Compute each company's 20X1 gross margin percentage and inventory turnover using cost of goods sold as reported by each company. 2. Restate KW's cost of goods sold and inventory balances to the FIFO basis. On the basis of its adjusted data, recompute KW's gross margin percentage and inventory turnover.
1. KW Steel group: gross margin %= 20.0. Inventory turnover= 4.6 Waretown steel: gross margin %: 24. Inventory turnover= 3.9 2. KW Steel group: COGS FIFO= $3,384.70. Gross margin %= 21. Inventory turnover= 3.1. Waretown steel: COGS FIFO= $2,724. Gross margin %= 24. Inventory turnover= 3.9
Kendall Corporation designs and manufactures sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 20X1, to improve its cash flow, Kendall establishes a securitization entity (SE) and (1) transfers without recourse $20.5 million of its receivables to the SE and (2) surrenders control over these receivables. The SE then sells securities backed by the cash flows associated with Kendall's receivables. Because the SE is separate from Kendall, and the receivables are diversified across hundreds of customers, investors are willing to pay $24 million for the securities. The SE then transfers the $24 million to Kendall Corporation. 1. Prepare Kendall's entry to record the securitization as a sale. 2. Show how your answer to requirement 1 would change if control over the receivables is not surrendered at the time of the transfer (i.e., an agreement exists whereby Kendall would be forced to absorb significant losses associated with the SE's receivables).
1. Securitization as a sale Debit Cash (receivable from SE) $24m Credit AR $20.5M and Gain on sale of receivables $3.5M 2. If control over the receivables is not surrendered at the transfer Debit cash $24M Credit Loan payable $24M
During your audit of Patti Company's ending inventory at December 31, 20X1, you find the following inventory accounting errors: Goods in Patti's warehouse on consignment from Valley, Inc., were included in Patti's ending inventory. On December 31, 20X1, Patti received $4,700 worth of inventory, which was included in the 20X1 ending inventory. However, the invoice on this merchandise was not received by Patti until January 3, 20X2, at which time the purchase was recorded. The purchase should have been recorded in 20X1. Patti purchased merchandise on account on December 30, 20X1, but did not include these goods in inventory or record the purchase. These goods were shipped by the vendor f.o.b. shipping point (title transfers when goods are shipped) and were in transit on December 31, 20X1. Some of Patti's merchandise, shipped on consignment to Kaitlin Company in mid-December 20X1, was excluded from the December 31, 20X1, inventory. On December 28, 20X1, Patti shipped goods costing $10,000 to Likert, f.o.b. destination (title transfers when goods are received). Likert received the goods on January 4, 20X2, and notified Patti of their arrival. The goods were not included in Patti's 20X1 inventory balance. Assume that Patti uses the periodic inventory system. Indicate the effect (understate, overstate, or no effect) each of these errors would have on:
Answer in attached picture
Acute Company manufactures a single product. On December 31, 20X0, it adopted the dollar-value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was determined to be $300,000. Inventory data for succeeding years follow: Compute the inventory amounts at December 31, 20X1, 20X2, and 20X3, using the dollar-value LIFO inventory method for each year.
Ending inventory at dollar-value LIFO cost 20X1= $333,000 20X2= $357,000 20X3= $349,800
