TAX 9873 Study Guide - Midterm Guide: Profit Sharing, Accrual, Dj Premier
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1. Make all adjustments on the "Adjusting Journal Entries". Remember to include a description under each journal entry.
| 12 | . On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824, | ||||||||
| which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization. | |||||||||
| Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used. | |||||||||
| Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the | |||||||||
| investment account. | |||||||||
| 13. | ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used, | ||||||||
| prepare the entry to record bad debt expense. | |||||||||
| 14 | On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make | ||||||||
| annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 | |||||||||
| unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method | |||||||||
| of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet | |||||||||
| been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal | |||||||||
| entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for | |||||||||
| this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.) | |||||||||
| 15 | ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension | ||||||||
| plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014. | |||||||||
| Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry. | |||||||||
| Pension asset/liability (January 1) | $0 | ||||||||
| Actual return on plan assets | $40,000 | ||||||||
| Expected return on plan assets | $20,000 | ||||||||
| Contributions (funding) in 2014 | $37,000 | ||||||||
| Fair value of plan assets (December 31) | $75,000 | ||||||||
| Settlement rate | 10% | ||||||||
| Projected benefit obligation (January 1) | $0 | ||||||||
| Service cost | $60,000 | ||||||||
| Benefits paid in 2014 | $0 | ||||||||
| *For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature. | |||||||||
| 16 | On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of | ||||||||
| $10 per share on December 31, 2014. Additional information is as follows: | |||||||||
| a. The service period related to the restricted stock is 2 years. | |||||||||
| b. Vesting occurs if the CFO stays with the company for a two-year period. | |||||||||
| c. The par value of the common stock is $3 per share. | |||||||||
| Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation. | |||||||||
| Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense) | |||||||||
| 17 | Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15. | ||||||||
| However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full | |||||||||
| on the return's March 15, 2015 due date. | |||||||||
| ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600, | |||||||||
| so January through November income tax expense recognized amounts to $63,800 (11/12 months). | |||||||||
| Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents | |||||||||
| tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities. | |||||||||
| Based on the income before income taxes figure from the income statement, record December's income tax expense | |||||||||
| so that the entire year's total tax expense is correct. | |||||||||
Question A
Cash BudgetProblem
The Teletron Corporationmanufactures different types of printers for personal computers.The company is planning its cash needs for the first quarter of2006. In the past, Teletron has had to borrow money during thefirst quarter since sales peak during this period of time. It wouldlike to be aware of any potential cash shortages before theyoccur.
The Controller asks you,the Senior Budgeting Accountant, to prepare a Cashbudget for January, February, and March 2006 for the entirecompany. Today is December 1, 2005 and you have just met with otheremployees from the Purchasing, Production, Marketing, and Financedepartments. From this meeting you compiled the following table ofinformation (all based on estimates).
2005 | 2005 | 2006 | 2006 | 2006 | |
Nov | Dec | Jan | Feb | Mar | |
Raw MaterialsPurchases | $ 20,000 | $ 25,000 | $ 25,000 | $ 20,000 | $ 25,000 |
Direct Labor Hours | 1,600 hrs | 1,760 hrs | 1,760 hrs | 2,240 hrs | 1,760 hrs |
Factory OverheadCosts | $ 4,000 | $ 4,000 | $ 4,000 | $ 4,000 | $ 4,000 |
Selling & AdministrativeExpenses | $ 10,000 | $ 12,000 | $ 12,000 | $ 10,000 | $ 12,000 |
Sales to customers | $ 100,000 | $ 110,000 | $ 120,000 | $ 110,000 | $ 100,000 |
Monthly sales to clientsare expected to be collected as follows: 60% in the first monthfollowing the sale; 30% in the second month following the sale; and10% in the third month following the sale. Note that October 2005sales to customers totaled $ 90,000.
Raw Material Purchasesare expected to be paid as follows: 50% in the month of thepurchase; 50% in the following month.
The production workersmake $ 25 per hour. There is no overtime and all wages are paid inthe month they are incurred.
Factory Overhead Costs arepaid in the month following the month they are incurred.
Selling &Administrative Expenses are paid in the month in the month they areincurred.
Teletron plans onborrowing $ 100,000 from its bank and will receive the money onJanuary 1, 2006. The loan is due to be paid back in 2008 in a lumpsum payment. The yearly interest rate will be 12% and interest willbe paid each month (assume the same interest expense each monthregardless of the number of days in each month).
Teletron plans on makingtwo $ 75,000 federal income tax payments during 2006 %u2013 one inJanuary 2006 and the other one in June 2006.
Teletron plans on paying$ 200,000 cash for the purchase of new production machinery inFebruary 2006.
Teletron plans on issuing(selling) 30,000 new shares of common stock in March 2006. Thesales price is expected to be $ 25 per share.
Teletron expects its cashbalance on December 31, 2005 to be $ 45,000.
(continued onback)
Requirements:
1. Prepare a cash budget for Teletron for each month of the firstquarter 2006 (i.e. January, February, and March 2006).
2. Comment on whether the ending cash balances each month areadequate for Teletron%u2019s cash needs and what Teletron might doin a month where the estimated cash balance isnegative.
QuestionB
Cost-Volume-ProfitAnalysis Problem
The Salazar Corporation manufactures only oneproduct %u2013 a medium-size, high-quality paper shredder calledthe MS-100. In an effort to better understand cost behavior,Salazar%u2019s accounting department has identified its costs aseither variable or fixed.
Salazar%u2019s Management wants to performCost-Volume-Profit (CVP) analysis to evaluate three differentscenarios it is considering for the year 2012. Under the currentproduction process (Scenario 1), variable costs are $ 90 per unitand fixed costs are $ 420,000 per year. The sales price for theMS-100 is $150 per unit and the number of units to be sold in 2012is 20,000 units.
Scenarios
- Leave the current production process as it is- make no changes.
- Purchase machinery that will decreasevariable costs by $ 30 per unit will but increase yearly fixedcosts by $ 390,000
- Purchase machinery that will decreasevariable costs by $ 15 per unit but will increase yearly fixedcosts by $ 255,000.
Requirements:
a) Calculate thecontribution margin per unit and the contribution margin ratio foreach of the three scenarios. Show your calculations.
b) Calculate the breakevenpoint in units and dollars - only for ScenarioI, the current production process. Show yourcalculations.
c) Prepare a contributionmargin income statement for each of the threescenarios.
d) Which of the three scenariosprovides the highest net income for the Salazar Company?
Salazar%u2019s management subsequently makes adecision that the company must make
$ 918,000 of after-tax net income in 2012,otherwise certain investors might decide to sell their ownershipinterest.
e) Calculate the salesthat Salazar must make in order to produce an after-tax net incomeof $ 918,000 (both in total sales dollars and in total salesunits). This calculation should be based on thescenario in d) that provides that highest net income.Salazar%u2019s income tax rate is 20%. Show your calculations.
f) Prepare aforecasted contribution margin income statement that shows theresults for the sales level computed in part e) above.
