Question 1) Entries for bad debt expense.
The trial balance before adjustment of Pratt Company reports the following balances:
Dr. Cr.
Accounts receivable $100,000
Allowance for doubtful accounts $ 2,500
Sales (all on credit) 750,000
Sales returns and allowances 40,000
Instructions
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)?
Question 2) Inventory methods
Flynt Company was formed on December 1, 2006. The following information is available from Flynt 's inventory record for Product X.
Units Unit Cost
January 1, 2007 (beginning inventory) 1,600 $18.00
Purchases:
January 5, 2007 2,600 $20.00
January 25, 2007 2,400 $21.00
February 16, 2007 1,000 $22.00
March 15, 2007 1,800 $23.00
A physical inventory on March 31, 2007, shows 2,500 units on hand.
Instructions:
Prepare schedules to compute the ending inventory at March 31, 2007, under each of the following inventory methods:
(a) FIFO.
(b) LIFO.
(c) Weighted-average.
Show supporting computations in good form.
Question 3) Lower-of-cost-or-market.
At 12/31/06, the end of Feeney Company's first year of business, inventory was $4,100 and $2,800 at cost and at market, respectively.
Following is data relative to the 12/31/07 inventory of Feeney:
Original Net Net Realizable Appropriate
Cost Replacement Realizable Value Less Inventory
Item Per Unit Cost Value Normal Profit Value
A $ .65 $ .45
B .45 .40
C .70 .75
D .75 .65
E .90 .85
Selling price is $1.00/unit for all items. Disposal costs amount to 10% of selling price and a "normal" profit is 30% of selling price. There are 1,000 units of each item in the 12/31/07 inventory.
Instructions
(a) Prepare the entry at 12/31/06 necessary to implement the lower-of-cost-or-market procedure assuming Feeney uses a contra account for its balance sheet.
(b) Complete the last three columns in the 12/31/07 schedule above based upon the lower-of-cost-or-market rules.
(c) Prepare the entry(ies) necessary at 12/31/07 based on the data above.
(d) How are inventory losses disclosed on the income statement?
Question 4) Nonmonetary exchange.
Gorman Co. had a sheet metal cutter that cost $96,000 on January 5, 2002. This old cutter had an estimated life of ten years and a salvage value of $16,000. On April 3, 2007, the old cutter is exchanged for a new cutter with a market value of $48,000. The exchange lacked commercial substance. Gorman also received $12,000 cash. Assume that the last fiscal period ended on December 31, 2006, and that straight-line depreciation is used.
Instructions
(a) Show the calculation of the amount of the gain or loss to be recognized by Gorman Co.
(b) Prepare all entries that are necessary on April 3, 2007. Show a check of the amount recorded for the new cutter.
Question 5) Impairment of copyrights.
Presented below is information related to copyrights owned by Wamser Corporation at December 31, 2006.
Cost $2,700,000
Carrying amount 2,400,000
Expected future net cash flows 2,100,000
Fair value 1,400,000
Assume Wamser will continue to use this asset in the future. As of December 31, 2006, the copyrights have a remaining useful life of 5 years.
Instructions:
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2006.
(b) Prepare the journal entry to record amortization expense for 2007.
(c) The fair value of the copyright at December 31, 2007 is $1,500,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
Question 6) Payroll entries.
Total payroll of Thames Co. was $920,000, of which $160,000 represented amounts paid in excess of $90,000 to certain employees. The amount paid to employees in excess of $7,000 was $720,000. Income taxes withheld were $225,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee's wages to $90,000 and 1.45% in excess of $90,000.
Instructions
(a) Prepare the journal entry for the wages and salaries paid.
(b) Prepare the entry to record the employer payroll taxes.
Question 7) Lease criteria for classification by lessor.
What are the criteria that must be satisfied for a lessor to classify a lease as a direct-financing or sales-type lease?