Chapter 6 E6-1 Classifying cash on the balance sheet Boyer International is currently preparing its financial statements for 2017. The company has several different sources of cash and is trying to decide how to classify them. The sources of cash follow: $30,000 in a checking account with The First National Bank. $3,000 in checks dated December 4, 2017, received from customers. $250,000 in certificates of deposit through The First National Bank, which are to mature on November 15, 2020. $40,000 in a savings account with The First National Bank. $1,000 in the petty cash fund. As of December 31, 2017, there are receipts totalling $600 in the petty cash drawer. $50,000 held as a compensating balance for a loan with The First National Bank. The loan agreement requires Boyer International to maintain a compensating balance equal to 10 percent of the loan balance. During 2018, the outstanding principal balance will be reduced to $350,000. $8,000 in a checking account with Interstate Federal Savings Indicate how each source listed should be classified on the December 31, 2017, balance sheet. Explain each answer. E6-2 Classifying cash on the balance sheet The following items were taken from the financial records of Melvin Construction Company. $2,000 in a checking account. $8,000 invested in a treasury note due to mature in 90 days. $3,000 in a savings account that cannot be withdrawn until a $10,000 outstanding debt is paid off. $18,000 invested in securities that will be sold in two years to finance an expansion of the plant. $2,500 invested in IBM common shares. Management intends to liquidate this investment in less than six months. $15,000 held in escrow by a bank, serving as earnest money that binds management to a real estate contract. A $3,000 money order received in payment from a customer. Classify each item as (a) unrestricted cash, (b) restricted cash, or (c) investment. E6-5 Accounting for doubtful accounts: The allowance method The following items were extracted from the 2014 financial records of Cummins Inc. (dollars in millions): Allowance for doubtful accounts 12 (cr.) During the following year, assume the company writes off $5 of accounts receivable as uncollectible and then estimates $6 of the year’s receivables to be uncollectible. The company does not recover any previously written-off accounts. Prepare the entry to record the bad debt expense.Compute the final balance in allowance for doubtful accounts for the next year-end financial statement. E6-8 Preparing an aging schedule Potter Stables uses the aging method to estimate its bad debts. Sherman Potter, the company president, has given you the following aging of accounts receivable as of December 31, 2018, along with the historical probabilities that the account balances will not be collected. Account Age Balance Non-collection Probability Current $290,000 2% 1–45 days past due 110,000 5% 46–90 days past due 68,000 8% Over 90 days past due 40,000 15% Compute total receivables and expected bad debts as of December 31, 2018. P6-2 Bad debts over time Financial information for CNG Inc. follows: 2018 2017 2016 Credit sales $205,000 $200,000 $180,000 Actual bad debt write-offs 11,000 10,000 6,000 The company estimates bad debts for financial reporting purposes at 3 percent of credit sales. The balance in allowance for doubtful accounts as of January 1, 2016, was $10,000. REQUIRED: Provide the journal entries related to allowance for doubtful accounts for 2016, 2017, and 2018.Compute the balance in allowance for doubtful accounts as of December 31, 2018.Comment on the sufficiency of the bad debt expense and allowance over the three-year period. How did you come to your conclusion? P6-3 Accounting for uncollectible over two periods Glacier Ice Company uses a percentage-of-net-sales method to account for estimated bad debts. Historically, 3 percent of net sales has proven to be uncollectible. During 2017 and 2018, the company reported the following: 2018 2017 Gross sales $1,500,000 $1,800,000 Sales return and allowances 50,000 20,000 REQUIRED: Prepare the necessary adjusting entry on December 31, 2017, to record the estimated bad debt expense for 2017.Assume that the January 1, 2017, balance in allowance for doubtful accounts was $65,000 (credit) and that $70,000 in bad debts was written off the books during 2017. What is the December 31, 2017, balance in this account after adjustments?Prepare the necessary adjusting entry on December 31, 2018, to record the estimated bad debt expense for 2018.What is the December 31, 2018, balance in allowance for doubtful accounts? Assume that $85,000 in bad debts was written off the books during 2018. Chapter 7 E7-1 Goods in transit as of the end of the accounting period Dallas Manufacturing engaged in five transactions involving inventory at the end of 2017: Ordered $50,000 of inventory on December 29, 2017. The goods were shipped on December 30, 2017, with the terms FOB shipping point. Dallas received the inventory on January 4, 2018. Received an order to sell inventory with a cost of $40,000. The goods were shipped to the customer on December 31, 2017, and received on January 3, 2018. The terms of the sale were FOB shipping point. Received an order to sell inventory with a cost of $15,000. The goods were shipped to the customer on December 29, 2017, and received on January 2, 2018. The terms of the sale were FOB destination. Ordered $10,000 of inventory on December 27, 2017. The inventory was shipped on December 27, 2017, with the terms FOB destination. Dallas received the inventory on December 31, 2017. Ordered $75,000 of inventory on December 30, 2017. The inventory was shipped on December 31, 2017, with the terms FOB destination. Dallas received the inventory on January 3, 2018. Assume that Dallas included in inventory (12/31/17) all items from the five cases above. Explain how the resulting financial statements would be misstated. E7-3Accounting for inventory purchases Baymont Corporation purchased inventory on account on March 3, 2017, for a gross price of $50,000. The company purchased additional inventory on account on March 10, 2017, for a gross price of $140,000. Baymont Corporation paid for the first purchase on April 25, 2017, and for the second purchase on March 20, 2017. The company prepares monthly adjusting journal entries and uses the perpetual inventory method. Prepare journal entries for each transaction. E7-9 Inventory assumptions and manipulating income under specific identification Vinnie’s House of Televisions has 75 identical 27-inch colour monitors in stock on January 1, 2018. Vinnie maintains records of the serial number of each monitor to track its costs. Vinnie purchased the 75 monitors on December 5, 2017, for $450 each. He also purchased 50 on January 2, 2018, for $500 each and an additional 65 on January 15, 2018, for $600 each. Each monitor is priced to sell at $1,000. Vinnie sold 130 monitors during the month of January. Compute gross profit and ending inventory for the month if the company adheres to each of the following:FIFO cost flow assumptionAverage cost flow assumptionLIFO cost flow assumptionAssume that Vinnie uses the specific identification method to compute the cost of goods sold. Explain how Vinnie could manipulate the gross profit number. What are the highest and the lowest gross profit amounts Vinnie could report? What are some possible factors that could motivate Vinnie to report either the highest or the lowest net income amount? P7-5 Inventory accounting, earnings, taxes, and lower-of-cost-or market rule The purchase schedule for Laundryman’s Corporation is as follows: Date Items Purchased Cost per Item February 10 1,000 $75 May 15 3,000 $80 October 20 4,000 $82 The inventory balance as of the beginning of the year was $35,000 (500 units at $70 each). During the year ended December 31, the company sold 6,000 units for $150 per unit. Operating expenses other than cost of goods sold totalled $125,000. The effective income tax rate is 30 percent. REQUIRED: Prepare three income statements, one under each assumption—FIFO, LIFO, average.How many tax dollars would be saved by using LIFO instead of FIFO?Assume the market value of an item of inventory dropped to $78 as of the end of the year. Apply the lower-of-cost-or-market rule, and provide the appropriate journal entry (if necessary) under the FIFO, LIFO, and average assumptions.
m5_application_problems.docx
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M5 APPLICATION PROBLEMS
Chapter 6
E6-1 Classifying cash on the balance sheet
Boyer International is currently preparing its financial statements for
2017. The company has several different sources of cash and is trying to
decide how to classify them. The sources of cash follow:
1. $30,000 in a checking account with The First National Bank.
2. $3,000 in checks dated December 4, 2017, received from customers.
3. $250,000 in certificates of deposit through The First National Bank,
which are to mature on November 15, 2020.
4. $40,000 in a savings account with The First National Bank.
5. $1,000 in the petty cash fund. As of December 31, 2017, there are
receipts totalling $600 in the petty cash drawer.
6. $50,000 held as a compensating balance for a loan with The First
National Bank. The loan agreement requires Boyer International to
maintain a compensating balance equal to 10 percent of the loan balance.
During 2018, the outstanding principal balance will be reduced to
$350,000.
7. $8,000 in a checking account with Interstate Federal Savings
Indicate how each source listed should be classified on the December 31, 2017,
balance sheet. Explain each answer.
E6-2 Classifying cash on the balance sheet
The following items were taken from the financial records of Melvin
Construction Company.
1. $2,000 in a checking account.
2. $8,000 invested in a treasury note due to mature in 90 days.
3. $3,000 in a savings account that cannot be withdrawn until a $10,000
outstanding debt is paid off.
4. $18,000 invested in securities that will be sold in two years to finance an
expansion of the plant.
5. $2,500 invested in IBM common shares. Management intends to liquidate
this investment in less than six months.
6. $15,000 held in escrow by a bank, serving as earnest money that binds
management to a real estate contract.
7. A $3,000 money order received in payment from a customer.
Classify each item as (a) unrestricted cash, (b) restricted cash, or (c) investment.
E6-5 Accounting for doubtful accounts: The allowance method
The following items were extracted from the 2014 financial records of
Cummins Inc. (dollars in millions):
Allowance for doubtful accounts 12 (cr.)
During the following year, assume the company writes off $5 of accounts
receivable as uncollectible and then estimates $6 of the year’s receivables to
be uncollectible. The company does not recover any previously written-off
accounts.
a. Prepare the entry to record the bad debt expense.
b. Compute the final balance in allowance for doubtful accounts for the next
year-end financial statement.
E6-8 Preparing an aging schedule
Potter Stables uses the aging method to estimate its bad debts. Sherman
Potter, the company president, has given you the following aging of
accounts receivable as of December 31, 2018, along with the historical
probabilities that the account balances will not be collected.
Account Age
Balance Non-collection Probability
Current
$290,000
2%
1–45 days past due
110,000
5%
46–90 days past due
68,000
8%
Over 90 days past due
40,000
15%
Compute total receivables and expected bad debts as of December 31, 2018.
P6-2 Bad debts over time
Financial information for CNG Inc. follows:
2018
Credit sales
2017
2016
$205,000 $200,000 $180,000
Actual bad debt write-offs
11,000
10,000
6,000
The company estimates bad debts for financial reporting purposes at 3
percent of credit sales. The balance in allowance for doubtful accounts as of
January 1, 2016, was $10,000.
REQUIRED:
a. Provide the journal entries related to allowance for doubtful accounts for
2016, 2017, and 2018.
b. Compute the balance in allowance for doubtful accounts as of December 31,
2018.
c. Comment on the sufficiency of the bad debt expense and allowance over the
three-year period. How did you come to your conclusion?
P6-3 Accounting for uncollectible over two periods
Glacier Ice Company uses a percentage-of-net-sales method to account for
estimated bad debts. Historically, 3 percent of net sales has proven to be
uncollectible. During 2017 and 2018, the company reported the following:
2018
Gross sales
Sales return and allowances
2017
$1,500,000 $1,800,000
50,000
20,000
REQUIRED:
a. Prepare the necessary adjusting entry on December 31, 2017, to record the
estimated bad debt expense for 2017.
b. Assume that the January 1, 2017, balance in allowance for doubtful accounts
was $65,000 (credit) and that $70,000 in bad debts was written off the books
during 2017. What is the December 31, 2017, balance in this account after
adjustments?
c. Prepare the necessary adjusting entry on December 31, 2018, to record the
estimated bad debt expense for 2018.
d. What is the December 31, 2018, balance in allowance for doubtful accounts?
Assume that $85,000 in bad debts was written off the books during 2018.
Chapter 7
E7-1 Goods in transit as of the end of the accounting period
Dallas Manufacturing engaged in five transactions involving inventory at
the end of 2017:
1. Ordered $50,000 of inventory on December 29, 2017. The goods were
shipped on December 30, 2017, with the terms FOB shipping point.
Dallas received the inventory on January 4, 2018.
2. Received an order to sell inventory with a cost of $40,000. The goods
were shipped to the customer on December 31, 2017, and received on
January 3, 2018. The terms of the sale were FOB shipping point.
3. Received an order to sell inventory with a cost of $15,000. The goods
were shipped to the customer on December 29, 2017, and received on
January 2, 2018. The terms of the sale were FOB destination.
4. Ordered $10,000 of inventory on December 27, 2017. The inventory was
shipped on December 27, 2017, with the terms FOB destination. Dallas
received the inventory on December 31, 2017.
5. Ordered $75,000 of inventory on December 30, 2017. The inventory was
shipped on December 31, 2017, with the terms FOB destination. Dallas
received the inventory on January 3, 2018.
Assume that Dallas included in inventory (12/31/17) all items from the five
cases above. Explain how the resulting financial statements would be misstated.
E7-3 Accounting for inventory purchases
Baymont Corporation purchased inventory on account on March 3, 2017, for a
gross price of $50,000. The company purchased additional inventory on account
on March 10, 2017, for a gross price of $140,000. Baymont Corporation paid
for the first purchase on April 25, 2017, and for the second purchase on March
20, 2017. The company prepares monthly adjusting journal entries and uses the
perpetual inventory method.
Prepare journal entries for each transaction.
E7-9 Inventory assumptions and manipulating income under specific
identification
Vinnie’s House of Televisions has 75 identical 27-inch colour monitors in
stock on January 1, 2018. Vinnie maintains records of the serial number of
each monitor to track its costs. Vinnie purchased the 75 monitors on
December 5, 2017, for $450 each. He also purchased 50 on January 2, 2018,
for $500 each and an additional 65 on January 15, 2018, for $600 each.
Each monitor is priced to sell at $1,000. Vinnie sold 130 monitors during
the month of January.
a. Compute gross profit and ending inventory for the month if the company
adheres to each of the following:
➢ FIFO cost flow assumption
➢ Average cost flow assumption
➢ LIFO cost flow assumption
b. Assume that Vinnie uses the specific identification method to compute the
cost of goods sold. Explain how Vinnie could manipulate the gross profit
number. What are the highest and the lowest gross profit amounts Vinnie
could report? What are some possible factors that could motivate Vinnie to
report either the highest or the lowest net income amount?
P7-5 Inventory accounting, earnings, taxes, and lower-of-cost-or market
rule
The purchase schedule for Laundryman’s Corporation is as follows:
Date
Items Purchased Cost per Item
February 10
1,000
$75
May 15
3,000
$80
October 20
4,000
$82
The inventory balance as of the beginning of the year was $35,000 (500
units at $70 each). During the year ended December 31, the company sold
6,000 units for $150 per unit. Operating expenses other than cost of goods
sold totalled $125,000. The effective income tax rate is 30 percent.
REQUIRED:
a. Prepare three income statements, one under each assumption—FIFO, LIFO,
average.
b. How many tax dollars would be saved by using LIFO instead of FIFO?
c. Assume the market value of an item of inventory dropped to $78 as of the end
of the year. Apply the lower-of-cost-or-market rule, and provide the
appropriate journal entry (if necessary) under the FIFO, LIFO, and average
assumptions.
…
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