Information about the Vargo Company for the year ended 12/31/17 is given below. Some of the sections ask a question and require an answer (the questions are in bold type). If information is presented, and no question is asked, the information may be used on the last question (prepare a multi-step income statement for 2017). Show your computations and clearly label your answers.
This is not a group project. Complete the exam on your own. Exams are due by 1:00 p.m. on Monday, 12/11/17. Print a copy out (don't email it) and put it in the inbox outside my office suite if I'm not there when you drop it off. Include the exam questions (what you're holding in your hands) with your solution.
a. Vargo sells two products. The first (the "tibed") is sold only for cash and represents a single performance obligation (sale of the product). "Tibed" sales for the year are 214,000 units. "Tibed" sells for a price of $22.80 per unit, and Vargo incurs shipping costs of $2.75 per unit sold. Vargo had sales returns of $174,000 and sales discounts of $64,000 on "tibed" sales.
The second is a software package (the "tiderc") and is new for 2017. It has two performance obligations (sale of the software and a software update after 2 years). 61,000 units of "tiderc" were sold. "Tiderc" sells for $30 per unit. The standalone sales price of the software has been determined to be $25 and the standalone sales price of the update is $5.
How much revenue will Vargo record for Tiderc in 2017?
What journal entry is required to record Tiderc sales for 2017?
b. Vargo uses the periodic LIFO method to account for the "tibed" inventory. Vargo had the following inventory available for sale during the year.
| |
Units |
Cost |
|
Balance on 1/1/17
|
15,000
|
$5.25
|
|
3/15 purchase
|
55,000
|
$6.30
|
|
5/20 purchase
|
42,000
|
$6.65
|
|
7/11 purchase
|
25,000
|
$7.08
|
|
10/27 purchase
|
33,000
|
$7.15
|
|
12/2 purchase
|
55,000
|
$7.43
|
Freight-in of $2.55 per unit was incurred on "tibed" inventory, and is not reflected in the cost per unit above. Compute cost of goods sold for the "tibed" product, and ending inventory (at historical cost).
c. If the ending inventory had a replacement cost of $145,000 on 12/31/17, a net realizable value of $139,000 and a normal profit of $26,500, what is the dollar value of inventory reported at on the balance sheet? What adjustment and journal entry (if any) would be required?
d. Vargo's property plant and equipment consists of a building with a cost of $800,000 and a salvage value of $60,000 with a 15 year life purchased on 6/1/13 and a piece of equipment that cost $88,000 and a salvage value of $4,000 with a 5 year life purchased on 9/1/15. Vargo incurred delivery and installation charges of $8,000 on the equipment. Vargo spent $39,000 painting the building during 2017. On 1/1/17, Vargo revised the estimate on the life of the building. Vargo now estimates that the building will be in service until 12/31/30
On 10/1/17, Vargo exchanged the piece of equipment for a similar piece of equipment with the Eakin Company. The transaction had no commercial substance. The fair value of the equipment they gave up was $39,000. The fair value of the equipment received from Eakin was $34,000. In addition to the equipment, they received $5,000 in cash. Prepare the journal entry to record the transaction on Vargo's books.
Vargo considers depreciation to be an administrative expense. Compute depreciation expense for the building and equipment for 2017. Vargo computes depreciation to the nearest month and uses the 200% (double) declining balance method for both the building and equipment.
e. Vargo purchased land on 3/1/15 for future expansion at a cost of $90,000. They made improvements of $10,000 that will have an indefinite life, and $56,000 of improvements with a 10 year life. Vargo uses straight line depreciation to the nearest month for any land-related items that require depreciation. Compute any depreciation necessary for 2017.
f. On 8/1/17, Vargo decided to discontinue a segment of their business. The segment, which had a book value of $641,000 was sold for $562,000 on 12/1/17. The segment incurred a loss of $65,000 from 8/1/17 to 12/01/17. All amounts are pre-tax
g. Vargo changed accounting methods for revenue recognition during 2017. Had they used the new method in the prior years, the pre-tax cumulative effect would have been to decrease revenues by $210,000.
h. Vargo had a flood at one of their warehouses that was unusual and infrequent in nature. The loss from the flood was $144,000 before taxes.
i. Vargo pays their salespeople a commission of $2.75 per unit of "tibed" sold. NO commissions are paid on sales of "tiderc." Vargo also had the following expenses/revenues during the year:
| Advertising expense |
$295,000 |
| Administrative salaries |
852,000 |
| Sales salaries |
460,000 |
| President's salary |
205,000 |
| Insurance |
52,000 |
| Misc. office expenses |
28,500 |
| Revenue from leasing unused Building space |
47,000 |
J. Early in 2017, Vargo engaged Wheeler Inc. to design and construct a new manufacturing facility. Construction began on March 1, 2017 and was completed on December 31, 2017. (no depreciation is needed) Vargo made the following payments to Wheeler, Inc. during 2017:In order to help finance the construction, Vargo issued the following during 2017:
| Date |
Payment |
| 1-Mar-17 |
$260,000 |
| 31-Aug-17 |
400,000 |
| 31-Dec-17 |
300,000 |
1. $190,000 of 10-year, 9% bonds payable, issued at par on March I, 2017, with interest payable annually on Feb. 28.
In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $120,000, 10% note payable dated January 1, 2009 and due January I, 2021, and a $230,000 8% note payable dated January 1, 2011 and due January 1, 2020.
Compute the amounts of each of the following (show computations):
1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
2. Avoidable interest incurred during 2017.
3. Total amount of interest cost to be capitalized during 2017 and interest expense toi 2017. Prepare the journal entry to record interest capitalized/expensed.
k. Vargo had an average of 345,000 shares of common stock outstanding. Vargo has no preferred stock.
l. Vargo obtained a patent on 3/1/12 for $96,000 with a legal life remaining of 14 years that was estimated to have a useful life of 12 years. The future cash flows from the patent are estimated to be $44,000 as of 12/31/17 and the fair value is estimated to be $40,000. Make any entries necessary for the patent during 2017.
m. Vargo had an unrealized $37,000 gain on available for sale securities and an unrealized $15,000 loss on foreign currency exchange from international transactions.
n. Prepare the 2017 income statement in good form for Vat-go in a multi-step format and calculate comprehensive income. (use the two statement format in illustration 4-25 for comprehensive income). Revenue from each product should be shown on separate lines. Vargo has a tax rate of 26%. Clearly list expenses separately on the income statement (e.g. don't add up 5 things and call them "administrative expenses" - if you lump a bunch of expenses into one amount, I can't tell what you got right and wrong).