ESH203 Lecture Notes - Lecture 9: Sage Publications

Maria Young is the sole stockholder of Purl of Great Price Company (POGP Company), which produces high-end knitted sweaters and sweater vests for sale to retail outlets. The company started in January of the current year, and employs three knitters (each of whom work 40 hours per week) and one office manager/knitting supervisor (this employee works 20 hours per week as office manager, and 20 hours per week as knitting supervisor). All wages are paid in cash at the end of each month.

Each knitter has a knitting machine that is used about 2/3 of the knitter’s time, the rest of the knitter’s time being involved in hand knitting and piecing together the garments. The company also has a packaging machine used to wrap the garments in plastic for shipping, which is operated by the office manager/knitting supervisor approximately 5 hours per week.

The knitting machines were purchased on January 1 of the current year, and cost $2,400 each, with an anticipated useful life of 10 years and no salvage value. The packaging machine was purchased on the same date and cost $4,800, with the same anticipated useful life and salvage value.

POGP Company

UNADJUSTED TRIAL BALANCE

November 30, 20Y8

Since the company is more reliant on labor than machines, Maria decides to use direct labor hours (DLH) as the activity base for her predetermined factory overhead rate, rather than machine hours (MH).

Calculate the predetermined factory overhead rate for the current year. If required, round your answers to the nearest cent.

Add the amounts in requirements 2(B), 3(C), and 6(C) to the appropriate areas of the following job cost sheets. If there is no amount or an amount is zero, enter "0". If required, round your answers to the nearest cent.

Journalize the entries in requirements 2 - 8. Refer to the Chart of Accounts for exact wording of account titles.

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JOURNAL

ACCOUNTING EQUATION

What are the balances in the following accounts as of December 31?

from South Western Individual income Tax 2016 vol 39

Chapter 4, problem 58

58. Daniel B. Butler and Freida C. Butler, husband and wife,file a joint return. The Butlers live at 625 Oak Street in Corbin,KY 40707. Dan’s SSN is 111-11-1111, and Fredia’s is 123-45-6789.Dan was born on 01/15/1964. Frieda was born on August 20, 1965.

During 2014 Dan and Freida furnished over half of the totalsupport of each of the following individuals, all of whom stilllive at home:

Gina, their daughter 22 a full time student who married on12/21/14 has no income of her own and for 2014 did not file a jointreturn with her husband Casey, who earned $10,600.00 during 2014.Gina’s SSN is 123-45-6788

Sam their son is 20 who had a gross income of 6300 in 2014dropped out of college in October 2014. He had graduated highschool in May 2014. Sam’s SSN is 123-45-6787.

Ben their oldest son age 26 is a full time graduate student withgross income of 5200. Ben’s SSN is 123-45-6786

Dan was employed as a manager by WJJJ, Inc. EIN # 11-11111111,604 Franklin Street Corbin KY 40702, and Freida was employed as asalesperson for Corbin Realty KY 40701. Selected information fromthe W-2 forms provided by the employers is presented below. Dan andFreida use the cash method.

Line Description Dan Freida

1 Wages,tips, othercompensation 74,000 86,000

2 Federal income taxwithheld 11,000 12,400

17 State income taxwithheld 2,960 3,440

Freida sold a house on 12/30/14 and will be paid a commission of$3100(not included in the 86k reported on W-2) on the January 10,2015 closing date.

Other income (as reported on 1099forms) for 2014 consisted of the following:

Dividends on CSX stock (qualified) $4,200

Interest on savings at Second Bank 1,600

Interest on City of Corbinbonds 900

Interest on First BankCD 382

The 382 from First Bank was original issue discount. Dan andFreida collected 16k on the First Bank CD that matured on 09/30/14.The CD was purchased on 10/1/12 for $14,995.00 and the yield tomaturity was 3.3%

Dan received a Schedule K-1 from Falcon Partnership which showedhis distribution share of income as $7,000.00. In addition to theabove information, Dan and Freida’s itemized deductions includedthe following:

Paid on 2014 Kentucky incometax 700.00

Personal property taxpaid 600.00

Real estate taxespaid 1,800.00

Interest on home mortgage (CorbinS&L) 4,900.00

Cash contributions to the BoyScouts 800.00

Sales tax from the sales tax table is $1,860. Dan and Freidamade estimated tax payments of $8000.00. The Kentucky income taxrate is 4%.

Part 1- Tax Computation

Compute Dan and Freida’s 2014 income tax payable (or refund due)If you use tax forms for the computations you will need Form 1040and Schedules A, B and E. Suggested software H&R BLOCK Taxsoftware

Part 2 Tax Planning

Dan plans to reduce his work schedule and only work half timefor WJJJ in 2015. He has been writing songs for several years andwants to devote his time to developing a career as a songwriter.Because of the uncertainty in the music business, however, he wouldlike you to make all computations assuming that he will have noincome from song writing in 2015. To make up for the loss of incomeFreida plans to increase the amount of time she spends selling realestate. She estimates that she will be able to earn $90k in 2015.Assume that all other income and expense items will beapproximately the same as they were for 2014. Assume that Sam willbe in enrolled in college as a full time student for the summer andfall semesters. Will the Butlers have more or less disposableincome (after Federal income tax) in 2015? Write a letter to theButlers that contains your advice and prepare a memo for the taxfiles.

Ferntree Clothing Inc. is a company that makes and sellsclothing to upscale shops across the country. In 2005, the companydecided to add the sale of fabric to the company portfolio, sellingmainly to other clothing manufacturing companies. Ferntree soonrealized that this market was unprofitable with low margins andwith the continued increase in on-line sales ,their fabric divisionwas suffering.

The company’s current controller vacated the position withoutnotice four months ago and Ferntree has hired you as their newcontroller to make any adjustments necessary and correct any errorsyou may find. The fiscal year end is January 31, 2017 and you willneed to correct errors, make adjustments and draft financialstatements using ASPE in preparation for the annual audit. Thefollowing information has been gathered for you to work with.

The trial balance at January 31, 2017, before any adjustments isprovided on the attached excel worksheet.

Your review through the company files has led you to thefollowing information, which may require adjustments:

1. In October of 2016, the shareholders met and decided to sellthe fabric division. By December 2016, it became apparent that abuyer is unlikely to be found. The only asset of this division isthe inventory, and all attempts have been made to sell this byyear-end. The company is expected to recover the book value of theinventory as it is being carried at its current fair value. Thereare no liabilities relating to this division. (Hint: Regardless ofa buyer, this would be classified as a gain/loss from discontinuedoperations).

2. The company paid a dividend of $25,000 to its shareholders inDecember 2016. This amount was incorrectly recorded as a cost ofgoods sold for the clothing division.

3. Last years accounts payable had been paid: $25,000 for theclothing division and $15,000 for the fabric division. When theywere paid, they had been debited to cost of goods sold for clothingdivision and operating expenses for the fabric division.

4. Upon reviewing the aged accounts receivable, it is apparentthat one account in the amount $5,000 had become uncollectible andwas written off to bad debt expense. In the past, 1% of accountsreceivable had been used to estimate the allowance for doubtfulaccounts, but this year given the past history, they have decidedto increase that amount to 2% of accounts receivable. All accountsreceivable and the allowance account relate to the clothingdivision.(Hint: adjust the bad debt expense and allowance accountfirst before you adjust for the allowance for doubtfulaccounts).

5. In January 2017, some old equipment was sold for proceeds of$250 cash. The original equipment cost $5,000 and had accumulateddepreciation of $4,900. The entry made when depositing the cash wasdebit Cash, credit equipment for $250. The equipment is beingamortized using the straight-line method over 10 years.Depreciation has not been recorded for the current year for theremainder of the equipment in this account.

6. FV-NI investments are long-term investments. The fair valueof the portfolio investments at January 31, 2017 was $35,000.

7. Insurance is paid each November 30th and covers a 12-monthperiod. When the company paid the insurance, it was debited toinsurance expense.

8. The note payable is due in two equal installments of $25,000each, plus interest on January 31, 2018 and 2019. The annualinterest rate is 5% and the note has been outstanding since August1, 2016.

9. Unpaid salaries and wages amounted to $1,500 at January 31,2017 and will be paid in the first payroll of February 2017. Thesehave not been recorded.

10. In reviewing sales, it was determined that the balance inthe unearned revenue account as at January 31, 2017 should be$30,000. The entire amount relates to the clothing division.

11. Ferntree has been making some income tax installments anddebiting these payments to the Income Taxes Payable account. It hasbeen determined that the applicable tax rate is 25%. The adjustingentry needed for taxes has not been recorded yet. (Hint: do thisentry last)

Required: a) Prepare all adjusting and correcting entries basedon the above information.

b) Post these entries journal entries to the trial balance andcomplete other columns of the work in good form

c) Prepare the January 31, 2017 Combined IncomeStatement/Comprehensive Income using the Multi-step incomestatement format, Statement of Financial Position and Statement ofRetained Earnings for Ferntree Clothing Inc. for the fiscal yearended January 31, 2017