Monday, October 31, 2011

B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange

FINANCE

B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose Philadelphia Electric's bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.

A. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?
B. Suppose that the yield to maturity for all these bonds changed instantaneously to 7%. What is the fair price of each bond now?
C. Suppose that the yield to maturity for all of these bonds changed instantaneously again, this time to 9%. Now what is the fair price of each bond?
D. Based on the fair prices at the various yields to maturity, is interest-rate risk the same, higher, or lower for longer - versus shorter maturity bonds?

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A12 (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25

FINANCE

A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is non growing. What is the required return on James River preferred stock?

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A14 (Stock valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required

FINANCE

A14. (Stock valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter). What is the stock worth?

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A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%

FINANCE

A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?

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A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate

FINANCE

A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?

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P8-4B The following information is available to reconcile Style Co's book balance of cash with its bank statement cash balance as of December 31, 2005

ACCOUNTING

ACC 225 Week 8

Problems 8-4B

The following information is available to reconcile Style Co.’s book balance of cash with its bank statement cash balance as of December 31, 2005:

a. After posting is complete, the December 31 cash balance according to the accounting records is $31,743.70, and the bank statement cash balance for that date is $45,091.80.
b. Check No. 1273 for $1,084.20 and Check No. 1282 for $390.00, both written and entered in the accounting records in December, are not among the canceled checks. Two checks, No. 1231 for $2,289.00 and No. 1242 for $370.50, were outstanding on the most recent November 30 reconciliation. Check No. 1231 is listed with the December canceled checks, but Check No. 1242 is not.
c. When the December checks are compared with entries in the accounting records, it is found that Check No. 1267 had been correctly drawn for $2,435 to pay for office supplies but was erroneously entered in the accounting records as $2,453.
d. Two debit memoranda are enclosed with the statement and are unrecorded at the time of the reconciliation. One debit memorandum is for $749.50 and dealt with an NSF check for $732 received from a customer, Titus Industries, in payment of its account. The bank assessed a $17.50 fee for processing it. The second debit memorandum is a $79.00 charge for check printing. Style did not record these transactions before receiving the statement.
e. A credit memorandum indicates that the bank collected $20,000 cash on a note receivable for the company, deducted a $20 collection fee, and credited the balance to the company’s Cash account. Style did not record this transaction before receiving the statement.
f. Style’s December 31 daily cash receipts of $7,666.10 were placed in the bank’s night depository on that date, but do not appear on the December 31 bank statement.

Required
1. Prepare the bank reconciliation for this company as of December 31, 2005.
2. Prepare the journal entries necessary to bring the company’s book balance of cash into conformity with the reconciled cash balance as of December 31, 2005.
Analysis Component
3. Explain the nature of the communications conveyed by a bank when the bank sends the depositor (a) a debit memorandum and (b) a credit memorandum.

Check (1) Reconciled balance, $50,913.20; (2) Cr. Note Receivable $20,000

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RPM Music Center had the following petty cash transactions in March of the current year

ACCOUNTING

ACC 225 Week 8

Problems 8-3B

RPM Music Center had the following petty cash transactions in March of the current year:

March 5 Wrote a $200 check, cashed it, and gave the proceeds and the petty cashbox to Liz Buck, the petty cashier.
6 Paid $14.50 COD shipping charges on merchandise purchased for resale, terms FOB shipping point. RPM uses the perpetual system to account for merchandise inventory.
11 Paid $8.75 delivery charges on merchandise sold to a customer, terms FOB destination.
12 Purchased file folders for $12.13 that are immediately used.
14 Reimbursed Will Nelson, the manager, $9.65 for office supplies purchased and used.
18 Purchased printer paper for $22.54 that is immediately used.
27 Paid $47.10 COD shipping charges on merchandise purchased for resale, terms FOB shipping point.
28 Paid postage expenses of $16.
30 Reimbursed Nelson $58.80 for business car mileage.
31 Cash of $11.53 remained in the fund. Sorted the petty cash receipts by accounts affected and exchanged them for a check to reimburse the fund for expenditures. The fund amount is also increased to $250.

Required
1. Prepare the journal entry to establish the petty cash fund.
2. Prepare a petty cash payments report for March with these categories: delivery expense, mileage expense, postage expense, merchandise inventory (for transportation-in), and office supplies expense. Sort the payments into the appropriate categories and total the expenses in each category.
3. Prepare the journal entries for part 2 to both (a) reimburse and (b) increase the fund amount.

Check (2) Total expenses $189.47
(3a & 3b) Cr. Cash $238.47

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Problems 8-1B (P8-1B) For each of these five separate cases, identify the principle of internal control that is violated

ACCOUNTING

ACC 225 Week 8

Problems 8-1B

For each of these five separate cases, identify the principle of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.

1. Latoya Tally is the company’s computer specialist and oversees its computerized payroll system. Her boss recently asked her to put password protection on all office computers. Latoya has put a password in place that allows only the boss access to the file where pay rates are changed and personnel are added or deleted from the payroll.
2. Lake Theater has a computerized order-taking system for its tickets. The system is active all week and backed up every Friday night.
3. X2U Company has two employees handling acquisitions of inventory. One employee places purchase orders and pays vendors. The second employee receives the merchandise.
4. The owner of Super-Aid uses a check protector to perforate checks, making it difficult for anyone to alter the amount of the check. The check protector sits on the owner’s desk in an office
that contains company checks and is often unlocked.
5. LeAnn Company is a small business that has separated the duties of cash receipts and cash disbursements. The employee responsible for cash disbursements reconciles the bank account monthly.

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Exercise 8-6 (E8-6) Prepare a table with the following headings for a monthly bank reconciliation dated September 30

ACCOUNTING

ACC 225 Week 8

Exercise 8-6

Prepare a table with the following headings for a monthly bank reconciliation dated September 30:

For each item 1 through 12, place an x in the appropriate column to indicate whether the item should be added to or deducted from the book or bank balance, or whether it should not appear on the reconciliation. If the book balance is to be adjusted, place a Dr. or Cr. in the Adjust column to indicate whether the Cash balance should be debited or credited. At the left side of your table, number the items to correspond to the following list.

1. Bank service charge.
2. Checks written and mailed to payees on October 2.
3. Checks written by another depositor but charged against this company’s account.
4. Principal and interest on a note collected by the bank but not yet recorded by the company.
5. Special bank charge for collection of note in part 4 on this company’s behalf.
6. Check written against the company’s account and cleared by the bank; erroneously not recorded by the company’s recordkeeper.
7. Interest earned on the cash balance in the bank.
8. Night deposit made on September 30 after the bank closed.
9. Checks outstanding on August 31 that cleared the bank in September.
10. NSF check from customer returned on September 25 but not yet recorded by this company.
11. Checks written by the company and mailed to payees on September 30.
12. Deposit made on September 5 and processed by the bank on September 6.

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Exercise 8-5 (E8-5) Dane Co. establishes a $200 petty cash fund on January 1

ACCOUNTING

ACC 225 Week 8

Exercise 8-5

Dane Co. establishes a $200 petty cash fund on January 1. One week later, the fund shows $28 in cash along with receipts for the following expenditures: postage, $64; transportation-in, $19; delivery expenses, $36; and miscellaneous expenses, $53. Dane uses the perpetual system in accounting for merchandise inventory. Prepare journal entries to (1) establish the fund on January 1, (2) reimburse it on January 8, and (3) both reimburse the fund and increase it to $500 on January 8, assuming no entry in part 2.

Check (3) Cr. Cash $472 (total)

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Quick Study Exercise 8-1 (QS 8-1) An internal control system consists of all policies and procedures used to protect assets, ensure reliable

ACCOUNTING

ACC 225 Week 8

Quick Study Exercise 8-1

An internal control system consists of all policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.
1. What is the main objective of internal control procedures, and how is it achieved?
2. Why should recordkeeping for assets be separated from custody over the assets?
3. Why should the responsibility for a transaction be divided between two or more individuals or departments?

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BIKE Company starts with $3000 cash to finance its business plan to produce bike helmets with a simple assembly process

ACCOUNTING

Understanding Revenue Recognition

For this assignment, turn to page 364 in your textbook (Chapter 6 of Financial Statements Analysis), and complete Case 6-1, Understanding Revenue Recognition.

BIKE Company starts with $3,000 cash to finance its business plan to produce bike helmets with a simple assembly process. During the first month of business the company signs sales contracts for 1,300 units ( sales price of $9 per unit), produces 1,200 units ( production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs:

This is the entire problem. Do you think it will be completed by tonight? Sorry but i need it by then.

1. commission of 10% of the selling price when the company collects from the customer;
2. shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same.

A. Prepare comprehensive (side by side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives:
1. Revenue is recognized at the time of shipment
2. Revenue is recognized at the time of collection
3. Revenue is recognized at the time of production

Note: net income for each of the three alternatives is (1) $990, (2) $810, and (3) $1080 respectively.

B. The method where revenue is recognized at the time of collection, known as the installment method, is except the bull for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? (one line simple answer)

C. Comment on the usefulness of the installment method for a credit analyst is using both the balance sheet and income statement.

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Bryson Sciences is planning to purchase a high-powered microscopy machine for $55,000 and incur an additional $7,500 in installation expenses

FINANCE

Bryson Sciences is planning to purchase a high-powered microscopy machine for $55,000 and incur an additional $7,500 in installation expenses. It is replacing similar microscopy equipment that can be sold to net $35,000, resulting in taxes from a gain on the sale of $11,250. Because of this transaction, current assets will increase by $6,000 and current liabilities will increase by $4,000. Calculate the initial investment in the high-powered microscopy machine.

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A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $175,000

FINANCE

A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $175,000. Since then, it has taken depreciation deductions totaling $124,250. What is the system's current book value? If Largo sold the system for $110,000 how much recaptured depreciation would result?

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P6-21 The following are selected portions of the report of management from a published annual report

ACCOUNTING

Auditing P 6-21 The following are selected portions of the report of management from a published annual report.

Report of Management

Managements Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of its President and Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management evaluates the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management, under the supervision and with participation of the Company’s president and Chief Executive Officer and Chief Financial Officer assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007 and concluded it is effective.

Management’s Responsibility for Consolidated Financial Statements
The management of Colgate-Palmolive Company is also responsible for the preparation and content of the accompanying consolidated financial statements as well as all other related information contained in this annual report. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States, and necessarily include amounts which are based on management’s best estimates and judgments.

Required:
a. What are the purposes of the two parts of the report of management?
b. What is the auditors responsibility related to the report of management?

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Sunday, October 30, 2011

1. Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services to the public and other

ACCOUNTING

MULTIPLE CHOICE

1. Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services to the public and other public accountants.

2. In some situations, the interpretations of the Rules of Conduct permit former partners to have relationships with a client of the firm without affecting the firm’s independence. Which of the following situations would not cause a loss of independence?

3. Anna Greer, a CPA in public practice, contacts Blake Sawyers, an employee of Jackson & Jackson, LLP, and makes him an offer of employment without first notifying Jackson & Jackson, LLP. According to the AICPA’s Code of Professional Conduct, Anna’s behavior:

4. When the question arises whether a CPA firm may do both bookkeeping and auditing services for the same public company client, the Interpretations of the AICPA’s Code of Professional Conduct:

5. A member in public practice may perform for a contingent fee any professional services for a client for whom the member or member’s firm performs:

6. “Independence” in auditing means:

7. Interpretations of the rules regarding independence allow an auditor to serve as:

8. Which of the following statements is true? The CPA firm will lose its independence if:

9. Which of the following statements is not true with respect to audit committees?

10. According to the Principles section of the Code of Professional Conduct, all members:

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PR 16-1A The comparative balance sheet of Flack Inc for December 31, 2013 and 2012 is shown as follows

ACCOUNTING

PR 16-1A The comparative balance sheet of Flack Inc for December 31, 2013 and 2012 is shown as follows:

Assets:
Dec 31, 2013 Dec 2012
Cash $234,660 $219,720
Accounts receivables 85,440 78,360
Inventories 240,660 231,420
Investments 0 90,000
Land 123,000 0
Equipment 264,420 207,420
Accumulated Depreciation-Equipment (62,400) (55,500)
885,780 771,420

Liabilities and Stockholders Equity
Accounts payable (merchandise creditor) 159,180 151,860
Accrued expenses payable (operations expenses) 15,840 19,740
Dividends payable 9,000 7,200
Common stock $1 par 48,000 36,000
Paid in capital excess of par-common stock 180,000 105,000
Retained earnings 473,760 451,620
885,780 771,420

The following additional information was taken from the records:
a. The investments were sold for $105,000 cash.
b. Equipment and land were acquired for cash.
c. There was no disposal of equipment during the year.
d. Common stock was issued for cash.
e. There was a $58,140 credit to retained earnings for net income.
f. There was a $36,000 debit to retained earnings for cash dividends declared.

Instructions
Prepare a statement of cash flows using the indirect method of presenting cash flows from operating activities

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P1-3A On June 1 Eckersley Service Company was started with an investment of $26,200 cash

ACCOUNTING

P1-3A On June 1 Eckersley Service Company was started with an investment of $26,200 cash. Here are the assets and liabilities of the company on June 30, and the revenues and expenses for the month of June, its first month of operations.

Cash $4,600 Notes payable $12,000
Accounts receivable 4,000 Accounts payable 500
Revenue 7,000 Supplies expense 1,000
Supplies 2,400 Gas & oil expense 600
Advertising expense 400 Utilities expense 300
Equipment 29,000 Wage expense 1,400

In June, the company issued no additional common stock, but paid dividends of $2,000.

Instructions
(a) Complete an income statement and a retained earnings statement for the month of June and a balance sheet at June 30, 2010.
(b)
(c)

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BE1-8 Use the basic accounting equation to answer these questions

ACCOUNTING

BE1-8 Use the basic accounting equation to answer these questions.
(a) The liabilities of Cummings Company are $90,000 and the stockholders' equity is $230,000. What is the amount of Cummings Company's total assets?
(b) The total assets of Haldeman Company are $170,000 and its stockholders' equity is $90,000. What is the amount of its total liabilities?
(c) The total assets of Dain Co. are $800,000 and its liabilities are equal to one-fourth of its total assets. What is the amount of Dain Co.'s stockholders' equity?

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Saturday, October 29, 2011

P2-3A You are provided with the following information for Kiley Enterprises, effective as of its April 30, 2010, year-end

ACCOUNTING

P2-3A You are provided with the following information for Kiley Enterprises, effective as of its April 30, 2010, year-end.

Accounts payable $834
Accounts receivable 810
Building, net of accumulated depreciation 1,537
Cash 1,270
Common stock 900
Cost of goods sold 990
Current portion of long-term debt 450
Depreciation expense 335
Dividends paid during the year 325
Equipment, net of accumulated depreciation 1,220
Income tax expense 165
Income taxes payable 135
Interest expense 400
Inventories 967
Land 2,100
Long-term debt 3,500
Prepaid expenses 12
Retained earnings, beginning 1,600
Revenues 4,600
Selling expenses 210
Short-term investments 1,200
Wages expense 700
Wages payable 222

(a) Complete income statement and a retained earnings statement for Kiley Enterprises for the year ended April 30, 2010.
(b) Complete the classified balance sheet for Kiley Enterprises as of April 30, 2010.

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P3-4A Four Oaks Miniature Golf and Driving Range Inc. was opened on March 1 by Tiger Woodley

ACCOUNTING

P3-4A Four Oaks Miniature Golf and Driving Range Inc. was opened on March 1 by Tiger Woodley. These selected events and transactions occurred during March.

Mar. 1 Stockholders invested $50,000 cash in the business in exchange for common stock of the corporation.
3 Purchased Arnie's Golf Land for $38,000 cash. The price consists of land $23,000, building $9,000, and equipment $6,000. (Record this in a single entry.)
5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,600 cash.
6 Paid cash $2,400 for a 1-year insurance policy.
10 Purchased golf clubs and other equipment for $4,700 From Golden Bear Company, payable in 30 days.
18 Received golf ices of $1,200 in cash from customers for golf fees earned.
19 Sold 100 coupon books for $25 each in cash. Each book contains ten coupons that enable the holder to play one round of miniature golf or to hit one bucket of golf balls. (Hint: The revenue is not earned until the customers use the coupons.)
25 Paid a $500 cash dividend.
30 Paid salaries of $700.
30 Paid Golden Bear Company in full for equipment purchased on March 10.
31 Received $800 in cash from customers for golf fees earned.

The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Golf Revenue, Common Stock, Retained Earnings, Dividends, Golf Revenue, Advertising Expense, and Salaries Expense.

Instructions
Journalize the March transactions, including explanations

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P3-5A Sunflower Architects incorporated as licensed architects on April 1, 2010

ACCOUNTING

P3-5A Sunflower Architects incorporated as licensed architects on April 1, 2010. During the first month of the operation of the business, these events and transactions occurred:

Apr: I Stockholders invested 515,000 cash in exchange for common stock of the corporation.
1 Hired a secretary-receptionist at a salary of $375 per week, payable monthly.
2 Paid office rent for the month $900.
3 Purchased architectural supplies on account from Spring Green Company $1,000.
10 Completed blueprints on a carport and billed client $1,500 for services.
11 Received $500 cash advance from J. Madison to design a new home.
20 Received $2,300 cash for services completed and delivered to M. Svetlana.
30 Paid secretary-receptionist for the month $1,500.
30 Paid $300 to Spring Green Company for accounts payable due.

The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts Payable, Unearned Revenue, Common Stock, Service Revenue, Salaries Expense, and Rent Expense.

Instructions
(a) Journalize the transactions, including explanations.
(b) Post to the ledger T accounts.
(c) Prepare a trial balance on April 30, 2010

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ACC 225 Week Eight (Week 8) Version 7

ACCOUNTING

ACC 225 Week Eight (Week 8) Version 7

CheckPoint: Internal Control and Bank Reconciliations
Resources: Fundamental Accounting Principles, pp. 335 and 336
Complete Quick Study Exercise 8-1 pp. 335 and Exercise 8-5 and 8-6 on p. 336. Post your answers as an attachment.

Quick Study Exercise 8-1 SOLUTION
Exercise 8-5 SOLUTION
Exercise 8-6 SOLUTION


Individual: Internal Control and Bank Reconciliations
Resources: Fundamental Accounting Principles, pp. 341-343.

Complete Problems 8-1B, 8-3B, and 8-4B (including the Analysis Component) on pp. 341, 342 and 343. When responding to the cases in 8-1B, think critically about each case. Identify the principles of internal control that has been violated and provide an explanation of why you think that principle has been violated. Identify the consequences of the actions described in the cases. Make a recommendation for what the business should do to ensure adherence to principles of internal control.

Use the spreadsheet in Course Materials named Chapter 8-4B. Post your answers as an attachment.

Problems 8-1B SOLUTION
Problems 8-3B SOLUTION
Problems 8-4B SOLUTION

PR 19-5A Digital Tunes Inc. is in the business of developing, promoting, and selling musical talent on compact disc (CD)

ACCOUNTING

PR 19-5A Digital Tunes Inc. is in the business of developing, promoting, and selling musical talent on compact disc (CD). The company signed a new group, called Smashing Britney, on January 1, 2010. For the first six months of 2010, the company spent $4,000,000 on a media campaign for Smashing Britney and $1,200,000 in legal costs. The CD production began on February 1, 2010.

Digital Tunes uses a job order cost system to accumulate costs associated with a CD title. The unit direct materials cost for the CD is:
Blank CD…………. $1.80
Jewel case………….. 0.60
Song lyric insert…… 0.60

The production process is straightforward. First, the blank CDs are brought to a production area where the digital soundtrack is copied onto the CD. The copying machine requires one hour per 2,400 CDs.

After the CDs are copied, they are brought to an assembly area where an employee packs the CD with a jewel case and song lyric insert. The direct labor cost is $0.25 per unit.

The CDs are sold to record stores. Each record store is given promotional materials, such as posters and aisle displays. Promotional materials cost $40 per record store. In addition, shipping costs average $0.25 per CD.

Total completed production was 1,000,000 units during the year. Other information is as follows:
Number of customers (record stores)………………….. 42,500
Number of CDs sold………………………………….. 850,000
Wholesale price (to record store) per CD…………………. $16

Factory overhead cost is applied to jobs at the rate of $1,200 per copy machine hour. There were an additional 25,000 copied CDs, packages, and inserts waiting to be assembled on December 31, 2010.

Instructions
1. Prepare an annual income statement for the Smashing Britney CD, including supporting calculations, from the information above.
2. Determine the balances in the work in process and finished goods inventory for the Smashing Britney CD on December 31, 2010.

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PR 19-3A Lynch Furniture Company refinishes and reupholsters furniture

ACCOUNTING

PR 19-3A Lynch Furniture Company refinishes and reupholsters furniture. Lynch uses a job order cost system. When a prospective customer asks for a price quote on a job, the estimated cost data are inserted on an unnumbered job cost sheet. If the offer is accepted, a number is assigned to the job, and the costs incurred are recorded in the usual manner on the job cost sheet. After the job is completed, reasons for the variances between the estimated and actual costs are noted on the sheet. The data are then available to management in evaluating the efficiency of operations and in preparing quotes on future jobs. On May 10, 2010, an estimate of $1,530.00 for reupholstering a chair and couch was given to Queen Mercury. The estimate was based on the following data:
Estimated direct materials:
40 meters at $12 per meter………………………………………… $ 480.00
Estimated direct labor:
24 hours at $15 per hour…………………………………………….. 360.00
Estimated factory overhead (50% of direct labor cost)……………... 180.00
Total estimated costs…………………………………………….. $1,020.00
Markup (50% of production costs)…………………………………. 510.00
Total estimate……………………………………………………. $1,530.00

On May 16, the chair and couch were picked up from the residence of Queen Mercury, 10 Rhapsody Lane, Lake Forest, with a commitment to return them on June 12. The job was completed on June 8. The related materials requisitions and time tickets are summarized as follows:

Instructions
1. Prepare a job order cost sheet showing the estimate given to the customer. Use the format shown below.
2. Assign number 10-206 to the job, record the costs incurred, and complete the job order cost sheet. Comment on the reasons for the variances between actual costs and estimated costs. For this purpose, assume that five meters of materials were spoiled, the factory overhead rate has been proved to be satisfactory, and an inexperienced employee performed the work.

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PR 19-1A Keltner Co. uses a job order cost system

ACCOUNTING

PR 19-1A Keltner Co. uses a job order cost system. The following data summarize the operations related to production for November:
a. Materials purchased on account, $350,000.
b. Materials requisitioned, $275,000, of which $35,000 was for general factory use.
c. Factory labor used, $324,500, of which $45,500 was indirect.
d. Other costs incurred on account were for factory overhead, $128,600; selling expenses, $116,400; and administrative expenses, $72,500.
e. Prepaid expenses expired for factory overhead were $14,500; for selling expenses, $12,300; and for administrative expenses, $8,900.
f. Depreciation of office building was $42,000; of office equipment, $21,500; and of factory equipment, $14,500.
g. Factory overhead costs applied to jobs, $256,400.
h. Jobs completed, $726,500.
i. Cost of goods sold, $715,000.

Instructions
Journalize the entries to record the summarized operations.

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Friday, October 28, 2011

On March 1, 2010, Chance Company entered into a contract to build an apartment building

ACCOUNTING

P18-3 (Recognition of Profit and Entries on Long-Term Contract) On March 1, 2010, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period:

2010 2011 2012
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 520,000 0
Progress billing to date: 1,050,000 2,000,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,850,000

Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2012.
(c) Prepare a partial balance sheet for December 31, 2011, showing the balances in the receivables and inventory accounts.

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Problem 7-3A (P7-3A) The April transactions of Wise Company are described in Problem 7-1A

ACCOUNTING

ACC 225 Week 7

Problem 7-3A

The April transactions of Wise Company are described in Problem 7-1A.

Required
1. Prepare a general journal, a purchases journal like that in Exhibit 7.9, and a cash disbursements journal like that in Exhibit 7.11. Number all journal pages as page 3. Review the April transactions of Wise Company and enter those transactions that should be journalized in the general journal, the purchases journal, or the cash disbursements journal. Ignore any transactions that should be journalized in a sales journal or cash receipts journal.
2. Open the following general ledger accounts: Cash, Inventory, Office Supplies, Store Supplies, Store Equipment, Accounts Payable, Long-Term Notes Payable, Sales Salaries Expense, and Advertising Expense. Enter the March 31 balances of Cash ($85,000), Inventory ($125,000), and Long-Term Notes Payable ($210,000). Also open accounts payable subsidiary ledger accounts for Ned’s Supply, Negi Company, Price Company, and Madison, Inc.
3. Verify that amounts that should be posted as individual amounts from the journals have been
posted. (Such items are immediately posted.) Foot and crossfoot the journals and make the monthend postings.
4. Prepare a trial balance of the general ledger and a schedule of accounts payable.

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Exercise 7-16 (E7-16) A company that records credit purchases in a purchases journal and records purchases returns in a general journal made the

ACCOUNTING

ACC 225 Week 7

Exercise 7-16

A company that records credit purchases in a purchases journal and records purchases returns in a general journal made the following errors. Indicate when each error should be discovered.
1. Posted a purchases return to the Accounts Payable account and to the creditor’s subsidiary account but did not post the purchases return to the Inventory account.
2. Posted a purchases return to the Inventory account and to the Accounts Payable account but did not post to the creditor’s subsidiary account.
3. Correctly recorded a $4,000 purchase in the purchases journal but posted it to the creditor’s subsidiary account as a $400 purchase.
4. Made an addition error in determining the balance of a creditor’s subsidiary account.
5. Made an addition error in totaling the Office Supplies column of the purchases journal.

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Quick Study Questions 7-2 (QS 7-2) Fill in the blanks to complete the following descriptions

ACCOUNTING

ACC 225 Week 7

Quick Study Questions 7-2

Fill in the blanks to complete the following descriptions:
1. With processing, source documents are accumulated for a period and then processed all at the same time, such as once a day, week, or month.
2. A computer allows different computer users to share access to data and programs.
3. A is an input device that captures writing and other input directly from source documents.
4. software comprises programs that help manage a company’s vital operations, from manufacturing to accounting.

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ACC 225 Week Seven (Week 7) Version 7

ACCOUNTING

ACC 225 Week Seven (Week 7) Version 7

Checkpoint: Accounting Information Systems and Special Journals
Resources: Fundamental Accounting Principles, pp. 289–295
Complete Quick Study questions 7-2 on pp. 289; Exercise 7-16 on pp. 293 and Problem 7-3A on pp. 295, Post your answers as an attachment.

Quick Study questions 7-2 SOLUTION
Exercise 7-16 SOLUTION
Problem 7-3A SOLUTION

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music

ACCOUNTING

P13-12 (Warranties and Premiums) Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques— warranties and premiums— to attract customers.

Musical instruments and sound equipment are sold with a one- year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The premium is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and $ 20 for a CD player. Garison pays $ 32 for each CD player and estimates that 60% of the coupons given to customers will be redeemed.

Garison’s total sales for 2010 were $ 7,200,000—$ 5,700,000 from musical instruments and sound reproduction equipment and $ 1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $ 164,000 during 2010. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2010.

The accrual method is used by Garison to account for the warranty and premium costs for financial reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 2010, were as shown below.

Inventory of Premium CD Players $ 37,600
Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000

Instructions
Garison Music Emporium is preparing its financial statements for the year ended December 31, 2010. Determine the amounts that will be shown on the 2010 financial statements for the following:
(1) Warranty Expense
(2) Estimated Liability from Warranties
(3) Premium Expense
(4) Inventory of Premium CD Players
(5) Estimated Premium Claims Outstanding

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The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before

FINANCE

The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s in- come tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income?

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The Shrieves Corporation has $10,000 that it plans to invest in marketable securities

FINANCE

The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporate tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.

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B3 (Capital structure weights) The cost of capital is 14%, the after-tax cost of debt is 6%, and the cost of equity is 16%

FINANCE

B3. (Capital structure weights) The cost of capital is 14%, the after-tax cost of debt is 6%, and the cost of equity is 16%. What proportions of the firm are financed with debt and equity?

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B4. (Capital structure weights) The cost of capital is 14%, the after-tax cost of debt is 6%, and the cost of equity is 16%

FINANCE

B4. (Capital structure weights) The cost of capital is 14%, the after-tax cost of debt is 6%, and the cost of equity is 16%. What proportions of the firm are financed with debt and equity?

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B6. (Finding the WACC) The information given here has been gathered about O’ryan Swim-Where, Ltd.

FINANCE

B6. (Finding the WACC) The information given here has been gathered about O’ryan Swim-Where, Ltd. Based on this information, estimate O’ryan’s WACC.

Current market value of common shares (10 million outstanding) $23.63/share
Next year’s expected cash dividend $1.92/share
Expected constant annual dividend growth rate 8%
Current market value of bonds (100,000 bonds outstanding, 8.5% coupon, maturing in 21 years) $835.00/bond
Corporate tax rate 34%

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B3. (NPV) Truman State University is evaluating an investment in new air handling systems for some of its major buildings

FINANCE

B3. (NPV) Truman State University is evaluating an investment in new air handling systems for some of its major buildings. The expected outlays and the expected savings, in millions of dollars, are given here:

Time 0 1 2 3 4 Through 10
Outlays 2.0 3.0 4.0 0 0
Savings 0 0.5 1.0 1.5 2.0

What is the net present value of this investment if the required return is 8%?

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Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

ACCOUNTING

Auditing P 5-27 Sarah Robertson, CPA had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2008, Herb Majestic told her that he needed a large bank loan to "tide him over" until sales picked up as expected late 2009. In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will "be his solution"-he was sure he will get it as long as the financial statements don't look too bad. Robertson stated that she believed the statements will have to include a going concern explanatory paragraph, Majestic said that this wasn't needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan. Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2009. The bank sued Sarah Robertson for fraud. Required: Indicate whether or not you think the bank will succeed. Support your answer.

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Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange

ACCOUNTING

Auditing P 5-26 Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.
Several of Bank's customers were swindled by a fraudulent scheme perpetrated by Bank's president, who owned 90% of the voting stock of the company. The facts establish that Gordon & Groton were negligent but not reckless or grossly negligent in conduct of the audit, and neither participated in the fraudulent scheme or knew of its existence.

The customers are suing Gordon & Groton under the antifraud provisions of Section10b and Rule 10b-5 of the securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the president. The customer's suit for fraud is predicated exclusively on the nonfeasance of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.

Required:
Answer the following questions, setting forth reasons for any conclusions stated:
a. What is the probable outcome of the lawsuit?
b. What other theory of liability might the customers have asserted?

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The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010

ACCOUNTING

E 18-23 Transactions affecting retained earnings

The balance sheet of Consolidated Paper, Inc., included the following shareholders' equity accounts at December 31, 2010:

During 2011, several events and transactions affected the retained earnings of Consolidated Paper.

Required:
1. Prepare the appropriate entries for these events:
a. On March 3 the board of directors declared a property dividend of 240,000 shares of Leasco International common stock that Consolidated Paper had purchased in January as an investment (book value: $700,000). The investment shares had a fair value of $3 per share and were distributed March 31 to shareholders of record March 15.
b. On May 3 a 5-for-4 stock split was declared and distributed. The stock split was effected in the form of a 25% stock dividend. The market value of the $1 par common stock was $11 per share.
c. On July 5 a 2% common stock dividend was declared and distributed. The market value of the common stock was $11 per share.
d. On December 1 the board of directors declared the 8.8% cash dividend on the 90,000 preferred shares, payable on December 28 to shareholders of record December 20.
e. On December 1 the board of directors declared a cash dividend of $.50 per share on its common shares, payable on December 28 to shareholders of record December 20.
2. Prepare the shareholders' equity section of the balance sheet for Consolidated Paper, Inc., for the year ended at December 31, 2011. Net income for the year was $810,000.

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Presented here are several transactions and events of the General Fund of Johnson County

ACCOUNTING

3–10. Presented here are several transactions and events of the General Fund of Johnson County. All transactions and events relate to calendar year 2009.

1. Estimated revenues from the following sources were legally budgeted.
Sales taxes $ 6,000,000
Fines and forfeits 2,000,000
Licenses and permits 1,750,000
Intergovernmental revenues 350,000
Total $10,100,000

2. Appropriations for the following functions were legally budgeted .
General government $2,100,000
Public safety 3,890,000
Culture and recreation 700,000
Health and welfare 3,000,000
Total $9,690,000

3. During the year, revenues were received in cash from the following sources:
Sales taxes $ 5,930,000
Fines and forfeits 1,990,000
Licenses and permits 1,740,000
Intergovernmental revenues 385,000
Total $10,045,000

4. During the year, contracts and purchase orders were issued as follows:
General government $ 450,000
Public safety 800,000
Culture and recreation 280,000
Health and welfare 500,000
Total $2,030,000

5. Goods and services (these are a portion of the total ordered in transaction 4) were received, as follows:
Estimated Actual
General government $ 450,000 $ 452,000
Public safety 500,000 510,000
Culture and recreation 275,000 276,000
Health and welfare 500,000 500,000
Total $1,725,000 $1,738,000

6. A budget revision was approved by the County Commission. Estimated revenues for intergovernmental revenues were increased by $35,000. Appropriations for general government were increased by $100,000.

7. Vouchers were issued for items not previously encumbered, primarily personal services, in the following amounts:
General government $1,747,000
Public safety 3,080,000
Culture and recreation 418,000
Health and welfare 2,500,000
Total $7,745,000

a. Record the transactions in general journal form. Include subsidiary accounts as illustrated in this chapter.
b. Open budgetary, revenue, expenditure, and encumbrance general ledger control accounts and post the transactions. You may use T-accounts.
c. Open Revenue and Appropriations, Expenditures, and Encumbrances subsidiary ledgers. Post the transactions. Prove that the control account balances agree with the related subsidiary ledger accounts.
d. Assume a beginning Fund Balance—Unreserved of $150,000. Prepare a budgetary comparison schedule for the General Fund. Include encumbrances with expenditures. Use Illustration 3–4 as an example.
e. Assuming that encumbered appropriations do not lapse at the end of the budget year, how much of the 2009 appropriations, by function, did lapse at the end of 2009? Show computations in good form.

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Thursday, October 27, 2011

The Baker Independent School District passed an appropriations ordinance for the General Fund for a certain fiscal year in the amount of $50 million

ACCOUNTING

3–5. The Baker Independent School District passed an appropriations ordinance for the General Fund for a certain fiscal year in the amount of $50 million. Revenues were anticipated from sources other than the property tax in the amount of $24 million. The total assessed value of property in the school district amounts to $600 million. Owners of property have filed for and received household, old age, and other exemptions in the amount of $80 million. It is anticipated that 2 percent of the assessed taxes will not be collected.

a. Compute the amount to be raised from property taxes.
b. Compute the gross levy required to raise revenue in the amount you computed for requirement (a). Round the computation to the nearest dollar.
c. Compute the property tax rate per $100 net assessed valuation.
d. Compute the property tax rate per $1,000 net assessed valuation (this rate is often called the millage). Round fractional cents to the next higher whole cent.
e. You own a home with an assessed valuation of $60,000. You are eligible for a homestead exemption of $2,000; deduct this amount from the gross assessed valuation to determine the net assessed valuation (NAV) of your house. Multiply the NAV in thousands of dollars by the property tax rate computed in part (d) of this problem to determine the property tax payable
on your house.

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P5-28 Part 2 Jackson is a sophisticated investor

ACCOUNTING

Auditing P 5-28

Part 2
Jackson is a sophisticated investor. As such, she was initially a member of a small group that was going to participate in a private placement of $1 million of common stock of Clarion Corporation. Numerouis meetings were held between management and the investor group. Detailed financial and other information was supplied to the participants. Upon the eve of completion of the placement, it was aborted when one major investor withdrew. Clarion than decided to offer $2.5 million of Clarion common stock to the purble pursuant to the registration requirements of the Securities Act of 1933. Jackson subscribed to $300,000 of the Clarion public stock offering. Nin months later, Clarion’s earnings dropped significantly, and as a result, the stock dropped 20% beneath the offering price. In addition, the Dow Jones Industrial Average was down 10% from the time of the offering.

Jackson sold her shares as a loss of $60,000 and seeks to hold all parties liable who participated in the public offering, including Clarion’s CPA firm of Allen, Dunn, and Rose. Although the audit was performed to conformity with auditing standards, there were some relatively minor misstatements. The financial statements of Clarion Corporation, which were part of the registration statement, contained minor misleading facts. It is believed by Clarion and Allen, Dunn, and Rose that Jackson’s asserted claim is without merit.

Required: Answer the following questions setting forth reasons for any conclusions stated.
a. If Jackson sues under the Securities Act of 1933, what will be the basis of her claim?
b. What are the probable defenses that might be asserted by Allen, Dunn, and Rose in light of these facts?

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P5-28 Part 1 Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934

ACCOUNTING

Auditing P 5-28

Part 1
Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934. The act requires such a brokerage firm to file audited financial statements with the SEC annually. Mitchell & Moss, Whitlow’s CPAs performed the annual audit for the year ended December 31, 2009, and rendered an unqualified opinion, which was filed with the SEC along with Whitlow’s financial statements. During 2009, Charles, the president of Whitlow & Company, engaged in a huge embezzlement scheme that eventually bankrupted the firm. As a result, substantial losses were suffered by customers and shareholders of Whitlow & Company, including Thaxton, who had recently purchased several shares of stock of Whitlow & Company after reviewing the company’s 2009 audit report. Mitchell & Moss’s audit was deficient; if they had complied with auditing standards, the embezzlement, nor can their conduct. However, Mitchell & Moss had no knowledge of the embezzlement, nor can their conduct be categorized as reckless.

Required: Answer the following questions setting forth reasons for any conclusions stated.
a. What liability to Thaxton if any, does Mitchell & Moss have under the Securities Exchange Act of 1934?
b. What theory or theories of liability, if any, are available to Whitlow & Company’s customers and shareholders under common law?

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1 .The entry to record the cost of inventory sold includes a credit to cost of goods sold

ACCOUNTING

1 .The entry to record the cost of inventory sold includes a credit to cost of goods sold.

2. The faster the sale of inventory and the collection of cash, the higher the profits will be for a business.

3. In the closing entry process, the sales returns and allowances account is credited.

4. Operating expenses are divided into administrative expenses and selling expenses on the income statement.

5. A merchandiser purchases inventory on account under a perpetual inventory system with terms of 2/10 n/30. The merchandiser would:

Question 6
Ending inventory equals the number of units on hand multiplied by the unit cost.

Question 7
Sales revenue minus sales returns and allowances and sales discounts equals

Question 8
Under a perpetual inventory system, the adjusting entry to account for inventory shrinkage would include a:

Question 9
In period of increasing prices, FIFO produces lower cost of goods sold and higher gross profit than LIFO.

Question 10
An error in ending inventory carries over into the next period.

Question 11
Which of the following inventory costing methods is the LEAST likely to mimic the actual physical flow of inventory?

Question 12
Which of the following principles require the application of the lower-of-cost-or-market rule?

Question 13
A company makes two errors in the physical count of inventory. Beginning inventory was understated by $28,000 and ending inventory is understated by $43,000. Which of the following will be the net effect of the two errors?

Question 14
A deposit in transit has been recorded by the company but not by the bank.

Question 15
To maintain effective internal control, all incoming mail should be opened by a mailroom employee who has access to the accounting records.

Question 16
The initial entry to establish a petty cash fund involves a debit to cash and a credit to petty cash.

Question 17
Internal control does not:

Question 18
A check drawn by the depositor for $205 in payment of a liability was recorded in the journal as $502. This item would be included in the bank reconciliation as a(n):

Question 19
The entry to reimburse the petty cash fund includes a:

Question 20
Under the allowance method, the entry to write off an account that has been deemed uncollectible has no effect on the total asset's of the firm.

Question 21
The allowance method and the direct write-off method are both methods of aging accounts

Question 22
A written promise to pay a specified amount of money at a particular future date is referred to as a promissory note.

Question 23
One method of establishing control over collections of accounts receivable is to:

Question 24
Using the balance sheet approach to estimate uncollectibles, accounts, which are 90 days old,are:

Question 25
Under the direct write-off method, the entry to record an uncollectible account has the following effect on the financial statements:

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Wednesday, October 26, 2011

Polaski Inc. uses an actual cost, job order system

ACCOUNTING

Polaski Inc. uses an actual cost, job order system. The following transactions are for August 2010. At the beginning of the month, Direct Material Inventory was $ 2,000, Work in Process Inventory was $ 10,500, and Finished Gods Inventory $ 6,500.

- Direct material purchases on account totaled $ 90,000.
- Direct labor cost for the period totaled $ 75,600 for 8,000 direct labor hours; these costs were paid in cash.
- Actual overhead costs were $ 82,000 and are applied on production.
- The ending inventory of Direct Material Inventory was $ 3,500.
- The ending inventory of Work in Process Inventory was $ 7,750.
- Goods costing $ 243,700 were sold for $ 350,400 cash

a. What was the actual OH rate per direct labor hour?
b. Journalize the preceding transactions.
c. Determine the ending balance in Finished Goods Inventory.

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Stockman Co. began 2010 with three jobs in process

ACCOUNTING

Stockman Co. began 2010 with three jobs in process:

Type of Cost
Job No. Direct Material Direct Labor Overhead Total
247 $77,200 $91,400 36,560 $205,160
251 176,600 209,800 83,920 470,320
253 145,400 169,600 67,840 382,840
Totals $399,200 $470,800 $188,320 $1,058,320

During 2010, the following transactions occurred:

1. The firm purchased and paid for $542,000 of raw material.
Factory payroll records revealed the following:
- Indirect labor incurred was $54,000.
- Direct labor incurred was $602,800 and was associated with the jobs as follows:

Job No. Direct Labor Cost
247 $ 17,400
251 8,800
253 21,000
254 136,600
255 145,000
256 94,600
257 179,400

3. Material requistion forms issued during the year revealed the following:
- Indirect material issued totaled $ 76,000
- Direct material issued totaled $ 466,400 and was associated with jobs follows:

Job No. Direct Material Cost 247 $ 12,400
251 6,200
253 16,800
254 105,200
255 119,800
256 72,800
257 133,200

4. Overhead is applied to jobs on the basis of direct labor cost. Managment budgeted overhead of $ 240,000 and total direct labor cost of $ 600,000 for 2010. Actual total factory overhead costs ( including indirect labor and indirect material for the year totaled $ 244,400.

5. Jobs #247 through #255 were completed and delivered to customers, who paid for the goods in cash. The revenue on these jobs was $ 2,264,774.

a. Journalize all preceding events.
b. Determine the ending balances for the jobs still in process.
c. Determine the cost of jobs sold, adjusted for underapplied or oveapplied overhead.

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Jimmy Carter Company has provided information on intangible assets as follows

ACCOUNTING

Jimmy Carter Company has provided information on intangible assets as follows

A patent was purchased from Gerald Ford Company for $2,000,000 on January 1, 2006. Carter estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford's accounting records at a net book value of $2,000,000 when Ford sold it to Carter.

During 2007, a franchise was purchased from Ronald Reagan Company for $480,000. In addition, 5% of revenue from the franchise must be paid to Reagan. Revenue from the franchise for 2007 was $2,500,000.
Carter estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year of purchase.

Carter incurred research and development costs in 2007 as follows:
Materials and Equipment 142,000
Personnel 189,000
Indirect Costs 102,000

Carter estimates that these new costs will be recouped by December 31, 2010. The materials and equipment purchased have no alternative uses.

On January 1, 2007, because of recent events in the field, Carter estimates that the remaining life of the patent purchased on January 1, 2006, is only 5 years from January 1, 2007.

Instructions:
(a) Prepare a schedule showing the intangibles section of Carter's balance sheet at December 31, 2007. Show supporting computations in good form.
(b) Prepare a schedule showing the income statement effect for the year ended December 31, 2007, as a result of the facts above. Show supporting computations in good form

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Tuesday, October 25, 2011

ACC 490 Auditing Study Guide

ACCOUNTING

Chapter 1
1. An audit that involves obtaining and evaluating evidence in order to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations is a(n):
2. State accountancy laws are administered by:
3. A CPA performing audits of governmental entities must adhere to standards established by:
4. The subject matter of auditing consists of:
5. When providing audit services, the CPA is expected to be:
6. The audit report on internal control is a variation of which type of audit?

Matching 5-1
The professional standards identify five categories of assertions made by management that are contained in the financial statements. If any of these assertions is a misrepresentation, the statements could be materially misstated. The categories of assertions identified by the profession are:

A. Existence or occurrence
B. Completeness
C. Rights and obligations
D. Valuation or allocation
E. Presentation and disclosure

Following is a list of errors encountered during the conduct of an audit.

REQUIRED: Using the letters given above, indicate the assertion that is being misrepresented by each listed error.

1. A short-term loan obtained from the bank was not recorded.
2. The current portion of long-term debt was excluded from the current liabilities section of the balance sheet.
3. The fact that certain inventories were pledged as collateral on a bank loan was not mentioned in the statements.
4. Reported sales include transactions from the subsequent period.
5. A number of shipments were made that were never billed.
6. Clerical errors were made in the compilation of the physical inventory count.
7. Several fictitious sales were booked during the period.
8. Legal title has not been obtained to a truck purchased from a private party.
9. Some of the inventory is obsolete, with no current market.
10. Accrued liabilities include the utility bills of the owner.
11. The allowance for doubtful accounts was understated because of the failure to properly age the receivables at year-end.
12. The disposal of several pieces of machinery was never recorded.
13. Utility bills for the current period were recorded and paid in the following period.
14. A piece of land, carried as an investment, has been written up to reflect current appraisals of the property.
15. The subsidiary accounts receivable ledger is out of balance with the control account.

Chapter Six
1. Choices about audit evidence are influenced by all of the following except:
2. Specific audit objectives are normally:
3. Which of the following would not be considered corroborating information?
4. Which of the following would not be considered an analytical procedure?
5. Because of the effects of circulation, some audit evidence is more reliable than other audit evidence. Which of the following is generally considered to be the most reliable?

Chapter 8
True/False

REQUIRED: For each of the following items, indicate whether it is (T) True or (F) False. For those marked “False,” identify the error(s) and indicate the change or changes that are needed to make the statement true.

1. The FASB definition of materiality is stated in explicit quantitative terms.
2. Preliminary judgments about materiality are set for planning purposes and may be changed as the audit progresses.
3. In audit planning, the auditor should recognize that there may be several levels of materiality.
4. The auditor's preliminary judgment about materiality cannot be made before the financial statement date, when annual amounts become known.
5. Materiality judgments involve both quantitative and qualitative considerations.
6. Material misstatement is not possible for individual accounts with balances below the auditor's preliminary judgment about materiality.
7. Many auditors make the allocation of materiality on the basis of the balance sheet account balances alone.
8. Materiality should be allocated to the various accounts in proportion to their recorded balances.
9. As more materiality is allocated to an account, the amount of audit work on that account increases.
10. Analytical procedures are defined as “evaluations of financial information made by a study of plausible relationships among financial data components.”

Chapter 11

True/False

REQUIRED: For each of the following items, indicate whether it is (T) True or (F) False. For those marked “False,” identify the error(s) and indicate the change or changes that are needed to make the statement true.

1. An auditor will normally plan to perform tests of controls only if it has been determined that effective internal controls have been placed in operation.
2. Public company auditors must test controls related to all significant financial statement assertions.
3. Assessing control risk is the process of evaluating the effectiveness of an entity’s internal control in preventing or detecting material misstatement in the financial statements.
4. Internal control risk assertions are made for internal controls as a whole, not for individual assertions.
5. The auditor may base an assessment of control risk on the evidence collected while obtaining an understanding of internal controls.
6. Internal controls over the completeness assertion generally start by examining information recorded in the general ledger and tracing it backward through the systems of accounting and internal control.
7. Internal controls over the valuation and allocation assertion are similar to those for the existence and occurrence assertion.
8. To arrive at an assessment of control risk below the maximum, evidence must be obtained about the operating effectiveness of the necessary controls.
9. Control risk assessments may be expressed in quantitative or qualitative terms.
10. If control risk is assessed at the maximum, only this conclusion needs to be documented and not the basis for the assessment.

Matching 13-1

Careful consideration of sample design must be made to achieve efficient and effective statistical samples. This is accomplished through explicit specification of key factors and relating them through mathematical models. Consideration of the same factors in nonstatistical samples may help to produce more efficient and effective samples, even if the factors are not explicitly quantified.

REQUIRED: For each of the factors listed below, indicate its effect on sample size by inserting a D (for direct) or an I (for inverse) in the appropriate column(s).

Effect on
Factor Sample Size
1. Population size
2. Variation in the population
3. Tolerable misstatement
4. Expected misstatement
5. Risk of incorrect acceptance
6. Risk of incorrect rejection

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Monday, October 24, 2011

P1-1 The amounts of the assets and liabilities of Padre Travel Service as of June 30, 2010, the end of the current year, and its revenue and expenses

ACCOUNTING

The amounts of the assets and liabilities of Padre Travel Service as of June 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below. The retained earnings were $210,000, and the capital stock was $90,000 as of July 1, 2009, the beginning of the current year. Dividends of $180,000 were paid during the current year.

Accounts payable $71,500
Accounts receivable 188,100
Cash 318,300
Fees earned 1,579,200
Miscellaneous expense 16,000
Rent expense 226,800
Supplies 20,100
Supplies expense 42,600
Taxes expense 33,600
Utilities expense 135,000
Wages expense 790,200

Instructions
1. Prepare an income statement for the current year ended June 30, 2010.
2. Prepare a retained earnings statement for the current year ended June 30, 2010.
3. Prepare a balance sheet as of June 30, 2010.

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P5-22 In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records and the recorded amount

ACCOUNTING

Auditing P 5-22 In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records and the recorded amounts in the accounts receivable master file. A copy of all confirmations that had exceptions was turned over to the company controller investigate the reason for the difference. He, in turn, had the bookkeeper perform the analysis. The bookkeeper analyzed each exception., determined its cause, and prepared an elaborate spreadsheet explaining exceptions were caused by timing differences in the bookkeeper's report indicated that the exceptions were caused by timing differences in the clients' and customer's records. The auditor reviewed the spreadsheet and concluded that there were no material exceptions to accounts receivable.

Two years subsequent to the audit, it was determined that the bookkeeper had stolen thousands of dollars in the past 3 years by taking cash and overstating accounts receivable. In a lawsuit by the client against the CPA, an examination of the auditors December 31, 2009, accounts receivable working papers, which were subpoenaed by the court, indicated that one of the explanations in the bookkeeper's analysis of the exceptions was fictitious. The analysis stated the exception was caused by a sales allowance granted to the customer for defective merchandise the day before the end of the year. The difference was actually caused by the bookkeeper's theft.

Required:
a. What are the legal issues involved in this situation? What should the auditor use as a defense in the event that he is sued?
b. What was the CPA's deficiency in conducting the audit of accounts receivable?

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B3 (Cash dividend versus share repurchase) Consider a firm that has decided to make, but has not yet announced, a large bonus cash dividend amounting

FINANCE

B3. (Cash dividend versus share repurchase) Consider a firm that has decided to make, but has not yet announced, a large “bonus” cash dividend amounting in the aggregate to $5 million. The firm has 1 million shares outstanding that sell for $20 each. The firm has no debt; there are no taxes; and all transactions take place in a perfect capital market. Using calculations like those in the illustration of dividend irrelevance in a perfect capital market, show that shareholders will be indifferent between whether the firm pays out the “bonus” as a dividend or uses the money to buy back $5 million of its shares.

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A11 (Dividend adjustment model) Last year's dividend for Woolridge Outfitters was $1.00

FINANCE

A11. (Dividend adjustment model) Last year’s dividend for Woolridge Outfitters was $1.00. This year’s earnings per share are $4.00, and Woolridge’s target payout ratio is 40%. Using the dividend adjustment model, Equation (18.1), what would be this year’s dividend with each of the following adjustment factors?
a. 70%
b. 0%
c. 100%

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B2 (Choosing financial targets) Sanderson Manufacturing Company would like to achieve a capital structure consistent with a Baa2/BBB senior debt

FINANCE

B2. (Choosing financial targets) Sanderson Manufacturing Company would like to achieve a capital structure consistent with a Baa2/BBB senior debt rating. Sanderson has identified six comparable firms and calculated the credit statistics shown here.

a. Sanderson’s return on assets is 5.3%. It has a total capitalization of $600 million. What are reasonable targets for long-term debt/cap, funds from operations/LT debt, and fixed charge coverage?

b. Are there any firms among the six who are particularly good or bad comparable? Explain.
c. Suppose Sanderson’s current ratio of long-term debt to total cap is 60% but its fixed charge coverage is 3.00. What would you recommend?

FIRM A B C D E F
Senior debt rating Baa2/BBB Baa3/BBB− Baa2/BBB Baa1/A− Baa1/BBB− Baa2/BBB+
Return on assets 5.2% 5.0% 5.4% 5.7% 5.2% 5.3%
Long-term debt/cap 38% 41% 45% 40% 25% 43%
Total cap ($MM) 425 575 525 650 210 375
Funds from operations/LT debt 39% 43% 28% 46% 57% 43%
Fixed charge cov 2.57 2.83 2.75 2.38 3.59 2.15

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A8. (Domestic versus Eurobond borrowing costs) A firm can issue an eight-year public debt issue at par with an 11% coupon in the domestic market

FINANCE

A8. (Domestic versus Eurobond borrowing costs) A firm can issue an eight-year public debt issue at par with an 11% coupon in the domestic market. It can also issue 11.25% Eurobonds. If all other expenses are equal, which issue offers the firm the lower borrowing cost?

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A1. (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for $1,000,000

FINANCE

A1. (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for $1,000,000. The machine has a five-year life and would be depreciated straight line to a $100,000 salvage value. Hibernia Leasing will lease the same machine to AI for five annual $300,000 lease payments paid in arrears (at the end of each year). AI is in the 40% tax bracket. The before-tax cost of borrowing is 10%, and the after-tax cost of capital for the project would be 12%.

a. What cash flows does AI realize if it leases the machine instead of buying it?
b. What is the net advantage to leasing (NAL)?

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13-1 Why are ratios and trends used in financial analysis?

ACCOUNTING

1. Why are ratios and trends used in financial analysis?

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13-3 What is apparent from a horizontal presentation of financial statement information? A vertical presentation?

ACCOUNTING

3. What is apparent from a horizontal presentation of financial statement information? A vertical presentation?

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13-14 How do accounting principles affect financial statement analysis?

ACCOUNTING

14. How do accounting principles affect financial statement analysis?

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14-1 What is the purpose of the statement of cash flows

ACCOUNTING

1. What is the purpose of the statement of cash flows?

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14-3 What are noncash investing and financing activities? Provide an example.

ACCOUNTING

3. What are noncash investing and financing activities? Provide an example. How are such transactions shown on the statement of cash flows?

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14-12 What is the difference between preparing the statement of cash flows using the direct method and using the indirect method?

ACCOUNTING

12. What is the difference between preparing the statement of cash flows using the direct method and using the indirect method?

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14-13 Which method (direct or indirect) of presenting the statement of cash flows is more intuitively logical? Why?

ACCOUNTING

13. Which method (direct or indirect) of presenting the statement of cash flows is more intuitively logical? Why?

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14-14 What is the major advantage of using the indirect method to present the statement of cash flows?

ACCOUNTING

14. What is the major advantage of using the indirect method to present the statement of cash flows?

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1. Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

ACCOUNTING

MULTIPLE CHOICE

1. Which of the following would never require reporting deferred tax assets or deferred tax liabilities? (Points : 1)

2. Which of the following statements typifies defined contribution plans? (Points : 1)

3. Which of the following causes a temporary difference between taxable and pretax accounting income? (Points : 1)

4. Consider the following:
A. I present value of vested benefits at present pay levels
B. II present value of nonvested benefits at present pay levels
C. III present value of additional benefits related to projected pay increases
Which of the above constitutes the accumulated benefit obligation? (Points : 1)

5. Of the following temporary differences, which one ordinarily creates a deferred tax asset? (Points : 1)

6. The annual pension expense for what type of pension plan(s) is recorded by a journal entry that includes a debit to pension expense and a credit to the pension asset or pension liability? (Points : 1)

7. The postretirement benefit obligation is the: (Points : 1)

8. When the service method is used for amortizing prior service costs, the amount recognized each year is (Points : 1)

9. The result of interperiod tax allocation is that: (Points : 1)

10. Which of the following statements is true regarding SFAS 109 and its use of the asset and liability approach? (Points : 1)

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