Accounting -Brake Company utilizes the perpetual inventory method

January 30, 2017

Question
Intermediate Financial Accounting I

HOMEWORK – Week 8 (Chapters 17, 18, 19, and 21)

21 Questions

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Question 15

Brake Company utilizes the perpetual inventory method. Inventory information for Part # AB124 revealed the following for the month of May:

May 1

Balance 245 units @ \$8

May 10

Sold 210 @ \$23.50

May 11

Purchased 800 units @ \$9.50

May 16

Sold 300 @ \$23

May 20

Purchased 770 units @ \$11

May 26

Sold 350 @ \$24.50

Required: Determine the value of ending inventory and gross profit under each of the following methods:

(a) LIFO

(b) FIFO

(c) Average Cost

Solution:

Question 16

Grande Incorporated, a window installation company, is preparing its annual financial statements for the year ended December 31, 2009 and the following information in dollars is available:

Raw Material

FIFO Cost

Replacement Cost

Sales Price

Aluminum

70,000

50,000

79,000

Cedar shake siding

84,000

90,000

81,000

Lowered glass doors

116,000

120,000

150,000

Thermal windows

110,000

150,000

145,000

Total

380,000

410,000

455,000

· Selling Expenses are 15% of Sales.

· Normal Profit Margin is 20% of Sales.

· At December 31, 2009, the balance in Grande’s Raw Material inventory account was \$380,000 and the Allowance to Reduce Inventory to Market had a credit balance of \$50,000.

Required:

(a) Prepare a table with the headings below (and a row for each type of raw material) and determine the proper balance in the Allowance to Reduce Inventory to Market account at December 31, 2009.

Raw Material

FIFO

Cost

Replacement Cost

Ceiling

Floor

Deemed Market Value

Lower of Cost or Market

(b) Determine the amount of gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market account.

Solution:

Question 17

Lola industries purchased the following assets and constructed a building as well. All of this was done during the current year.

Assets 1 and 2:

These assets were purchased as a lump sum for \$110,000 cash. The following was gathered:

Description

Initial Cost on Seller’s Books

Depreciation to Date on Seller’s Books

Book Value on Seller’s Books

Appraised Value

Machinery

\$100,000

\$40,000

\$60,000

\$81,000

Office Equipment

70,000

25,000

45,000

44,000

Asset 3

Office Equipment was acquired by issuing 300 shares of \$6 par value common stock. The stock had a market value of \$14 per share.

Construction of Building

A building was constructed on land purchased last year at a cost of \$150,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows:

Date

Payment

2/1

\$100,000

6/1

380,000

9/1

460,000

11/1

120,000

To finance construction of the building, a \$600,000 10% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had \$200,000 of other outstanding debt during the year at a borrowing rate of 7%.

Required: Record all of the applicable acquisition/construction entries for each of these assets.

Solution:

Question 18

Rohan Company purchased equipment in January 2008 for \$8,000,000 and had an estimated useful life of 6 years with a salvage value of \$2,000,000. At December 31, 2010, new technology was introduced that would accelerate the obsolescence of Rohan’s equipment. Rohan’s controller estimates that expected future net cash flows on the equipment will be \$4,900,000 and that the fair value of the equipment is \$4,600,000. Rohan intends to continue using the equipment, but it is estimated that the remaining life is 2 years and new salvage value is \$1,000,000. Rohan uses straight-line depreciation.

Required:

(a) Prepare the journal entry (if any) to record the impairment at December 31, 2010.

(b) Prepare any journal entries for the equipment at December 31, 2011.

Solution:

Question 19

On May 1, 2011, Walker Company (a US company) paid US\$3,700,000 to acquire all of the common stock of Hayden Corporation (an Australian company), which now became a division of Walker. Hayden reported the following US\$ balance sheet at the time of the acquisition:

Book Value \$

Fair Value \$

Current Assets

900,000

1,500,000

Noncurrent Assets

2,700,000

2,300,000

Current liabilities

(600,000)

(700,000)

Long-term liabilities

(500,000)

(400,000)

At December 31, 2011, Hayden reports the following US\$ balance sheet information:

Book Value \$

Fair Value \$

Current Assets

800,000

800,000

Noncurrent Assets (excluding Goodwill)

1,500,000

1,300,000

Current liabilities

(700,000)

(700,000)

Long-term liabilities

(500,000)

(400,000)

During the annual impairment test conducted on December 31, 2011, it was determined that the fair value of the Hayden division as a whole was \$2,400,000.

Required:

(a) Compute the amount of goodwill recognized, if any, on May 1, 2011.

(b) Determine the impairment loss, if any, to be recorded on December 31, 2011.

(c) Determine the implied fair value of goodwill on December 31, 2011.

(d) On the assumption that the fair value of Hayden on December 31, 2010 was \$1,650,000 instead of \$2,400,000, determine the impairment loss, if any, to be recorded.

Solution:

Question 20

Walter & Company has produced the following detailed aging of outstanding accounts receivable as at December 31, 2009.

Age (days)

\$Amount Due

Probability of

collection.

0 – 30

400,000

90%

31 – 60

200,000

75%

61 – 90

300,000

50%

91 – 180

100,000

25%

Over 180

200,000

10%

Required:

(a) Prepare an aging analysis and show how accounts receivable and the related allowance for doubtful accounts would appear in the balance sheet at December 31, 2009.

(b) Prepare the necessary journal entry to update the allowance for doubtful accounts assuming that the balance prior to preparing the aging was a credit of \$100,000.

(c) One of the customers, Janet, who was in the “Over 180” days category owed \$60,000. On January 15, 2010, it was revealed that Janet was officially declared bankrupt and would only be able to repay a quarter of what she owed to any company. Prepare the journal entry to write off Janet’s uncollectible debt.

(d) On January 31, 2010, Janet won the lottery and on the same day she decided to repay all of her original debts to everyone whom she owed money. Prepare the journal entry to record Walter’s unexpected receipt of Janet’s payment.

Solution:

Question 21

Shown below is an income statement for 2010 that was prepared by a poorly trained bookkeeper of Howell Corporation.

Howell Corporation

INCOME STATEMENT

December 31, 2010

Sales revenue \$945,000

Investment revenue 19,500

Cost of merchandise sold (408,500)

Selling expenses (145,000)

Interest expense (13,000)

Income before special items 183,000

Special items

Loss on disposal of a component of the business (30,000)

Major casualty loss (extraordinary item) (70,000)

Net federal income tax liability (24,900)

Net income \$ 58,100

Required

Prepare a multiple-step income statement for 2010 for Howell Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology). Howell Corporation has 50,000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items. Round all earnings per share figures to the nearest cent.

Solution:

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