Intermediate Financial Accounting I
HOMEWORK Week 8 (Chapters 17, 18, 19, and 21)
21 Questions
__________________________________________________________________________________
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 Grandes 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 Sellers Books
Depreciation to Date on Sellers Books
Book Value on Sellers 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 Rohans equipment. Rohans 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 Janets 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 Walters unexpected receipt of Janets 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)
Administrative expense (215,000)
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: