Case Study-AW265

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Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2009. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%.

 

Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2011. The error had caused Wilkins to understate interest expense by $122,000 in 2009 and $13,000 in 2010.

 

Required
 

1. Determine which accounts are incorrect as a result of these errors at January 1, 2011, before any adjustments. Explain your answer. (Ignore income taxes.)
2. Prepare a journal entry to correct the error
3. What other step(s) would be taken in connection with the error?

 

Requirement 1

 

The error caused both 2009 net income and 2010 net income to be  (Over/Under Stated) so retained earnings is (Over/Under Stated)  by a total of $85,000.  Also, the note payable would be (Over/Under Stated) by the same amount.

 

So, if interest expense is (Over/Under Stated), the reduction in the note will be too much, causing the balance in that account to be (Over/Under Stated)

 

Requirement 2

 

Retained earnings (overstatement of 2009-2010 income)………………………..
Note payable (understatement determined above)……………………….

 

Requirement 3

The financial statements that were incorrect as a result of the error would be retrospectively restated to report the correct interest amounts, income, and retained earnings when those statements are reported again for comparative purposes in the current annual report.  A “????????????????” to retained earnings would be reported, and a ???????? should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share.

 

 

E 14-1

American Food Services, Inc., acquired a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2011. In payment for the $4,800,000 million machine, American Food Services issued a four-year installment note to be paid in four equal payments at the end of each year. The payments include interest at the rate of 10%.

 

Required:
 

1. Prepare the journal entry for American Food Services’ purchase of the machine on January 1, 2011.
2. Prepare an amortization schedule for the four-year term of the installment note.
3. Prepare the journal entry for the first installment payment on December 31, 2011.
4. Prepare the journal entry for the first installment payment on December 31, 2011.

 

 

Week Two Exercise Assignment

 

Revenue and Expenses

 

1. Recognition of concepts. Jim Armstrong operates a small company that books enter­tainers for theaters, parties, conventions, and so forth. The company’s fiscal year ends on June 30. Consider the following items and classify each as either (1) pre­paid expense, (2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of the foregoing.

 

a          Interest owed on the company’s bank loan, to be paid in early July

b          Professional fees earned but not billed as of June 30
 

c          Office supplies on hand at year-end

d          An advance payment from a client for a performance next month at a convention
 

e          The payment in part (d) from the client’s point of view

f           Amounts paid on June 30 for a 1-year insurance policy
 

g          The bank loan payable in part (a)

h          Repairs to the firm’s copy machine, incurred and paid in June

 

 

 
2. Understanding the closing process. Examine the following list of accounts

 

Note Payable	Accumulated Depreciation: Building
Alex Kenzy, Drawing	Accounts Payable
Product Revenue	Cash
Accounts Receivable	Supplies Expense
Utility Expense

 

Which of the preceding accounts
 

1. appear on a post-closing trial balance?
2. are commonly known as temporary, or nominal, accounts?
3. generate a debit to Income Summary in the closing process?
4. are closed to the capital account in the closing process?

 

 
3. Adjusting entries and financial statements. The following information pertains to Sally Corporation:

 

• The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one half of this amount had been earned.

 

• Sally Corporation provided $1,500 of services to Artech Corporation; no billing had been made by December 31.

 

• Salaries owed to employees at year-end amounted to $1,000.

 

• The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period.
• The company paid $18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Sally Corporation’s headquarters, beginning on November 1.

Sally Corporation’s accounting year ends on December 31.
 
Instructions
 
Analyze the five preceding cases individually and determine the following
 

1. The type of adjusting entry needed at year-end (Use the following codes: A, adjust­ment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue.)

 

2. The year-end journal entry to adjust the accounts
3. The income statement impact of each adjustment (e.g., increases total revenues by $500)

 

 
4. Adjusting entries. You have been retained to examine the records of Mary’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following

 

• On January 1, 20X3, the Supplies account had a balance of $1,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31.
• Unrecorded interest owed to the center totaled $275 as of December 31.

 

• All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $65,500 on August 31. With the exception of $15,500 all amounts were for the current semester ending on December 31.

 

• Depreciation on the school’s van was $3,000 for the year.
• On August 1, the center began to pay rent in 6-month installments of $24,000. Mary wrote a check to the owner of the building and recorded the check in Pre­paid Rent, a new account.

 

• Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.
• Mary’s Day Care paid insurance premiums as follows, each time debiting Pre­paid Insurance:

 

 

Date Paid	Policy No.	Length of Policy	Amount
Feb. 1, 20X2	1033MCM19	1 year	$540
Jan. 1, 20X3	7952789HP	1 year	912
Aug. 1, 20X3	XQ943675ST	2 years	840

 

Instructions

 

The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.

 

 

5. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Company for the month of January:

Balance per bank	$6,150
Balance per company records	3,580
Bank service charge for January	20
Deposits in transit	940
Interest on note collected by bank	100
Note collected by bank	1,000
NSF check returned by the bank with the bank statement	650
Outstanding checks	3,080

 

Instructions:

1. Prepare Palmetto’s January bank reconciliation.
2. Prepare any necessary journal entries for Palmetto.

 

 
6. Direct write-off method. Harrisburg Company, which began business in early 20X7, reported $40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was $550 for a sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles.

 

1. Prepare the journal entry needed to write off Mattingly’s account.
2. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.

 

 
7. Allowance method: analysis of receivables. At a January 20X2 meeting, the presi­dent of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded be­cause it had restricted the company’s growth. Credit decisions would now be made by the sales staff.

 

By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department
 

20X2		20X1
Sales	$23,987,000		$8,423,000
Accounts Receivable, 12/31	12,444,000		1,056,000
Allowance for Uncollectible Accounts, 12/31	?		23,000 cr.

 

The $12,444,000 receivables balance was aged as follows
 

Age of Receivable	Amount	Percentage of Accounts Expected to Be Collected
Under 31 days	$4,321,000	99%
31-60 days	4,890,000	90
61-90 days	1,067,000	80
Over 90 days	2,166,000	60

 

Assume that no accounts were written off during 20X2.
 
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Instructions

 

 
2. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.
3. What is the company’s Uncollectible Accounts expense for 20X2?
4. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
5. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.

 

Week Three Exercise Assignment

 

Inventory

 

1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.

Painting		Cost
1/2 Beginning inventory	Woods		$21,000
4/19 Purchase	Sunset		21,800
6/7 Purchase	Earth		31,200
12/16 Purchase	Moon		4,000

 

Woods and Moon were sold during the year for a total of $35,000. Determine the firm’s
 

1. cost of goods sold.
2. gross profit.
3. ending inventory.
4. Inventory valuation methods: basic computations. The January beginning inven­tory of the White Company consisted of 300 units costing $40 each. During the first quarter, the company purchased two batches of goods: 700 Units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.

 

 

FIFO		LIFO		Weighted Average
Goods available for sale	$		$		$
Ending inventory, March 31
Cost of goods sold

 

 

 
3. Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 follow

 

• 1/2/20X3 Purchases on account: 500 units @ $6 = $3,000
• 1/15/20X3 Sales on account: 300 units @ $8.50 = $2,550
• 1/20/20X3 Purchases on Account: 200 units @ 5 = $1,000
• 1/25/20X3 Sales on Account: 300 units @ $8.50 = $2,550

 
The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.

 
1. Duplicate the journal entries that would have appeared on the computer printout under FIFO & LIFO
2. Calculate the balance in the firm’s Inventory account under each method.
3. Briefly explain the absence of the Purchases account to the company president.

 

 
4. Inventory valuation methods: computations and concepts.

 

Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows

 

Date	Quantity	Unit Cost	Total Cost
1/3	100	$125	$12,500
4/3	200	$135	$27,000
6/3	100	$145	$14,500
7/3	100	$155	$15,500
Total	500		$69,500

 

 

Wild Riders sold 400 boards at $250 per board on the dates listed below.  The company uses a perpetual inventory system.

 

Date	Quantity Sold	Unit Price	Total Sales
3/17	50	$250	$12,500
5/17	75	$250	$18,750
8/10	275	$250	$68,750
Total	400		$100,000

 
Instructions
 

1. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods

 

• First-in, first-out
• Last-in, first-out
• Weighted average

 

1. Which of the three methods would be chosen if management’s goal is to

(1) produce an up-to-date inventory valuation on the balance sheet?

(2) show the lowest net income for tax purposes?

 

 
5. Depreciation methods. Mike Davis Enterprises purchased a delivery van for $40,000 in January 20X7. The van was estimated to have a service life of 5 years and a resid­ual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods

 

6. Units-of-output, assuming 17,000 miles were driven during 20X8
7. Straight-line
8. Double-declining-balance

 

 
6. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $2,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

 

7. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method
8. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.

 

9. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

 

 
7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3 – 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

Instructions
 

1. Compute depreciation for 20X3 – 20X7 by using the following methods: straight line, units of output, and double-declining-balance.

 

2. On January 1, 20X5, management shortened the remaining service life of the machine to 15 months. Assuming use of the
    
   1. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.

    

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