AFM291 Lecture Notes - Lecture 6: Write-Off, Overproduction, Historical Cost
Document Summary
Get access
Related Documents
Related Questions
Instructions: PLEASE ONLY SELECT THE CORRECT LETTER CHOICE AT THE END.
Use the following balance sheet information from Aggie Health and Fitness Centersâ month-end financial statements dated August 31, 2016 and open t-accounts for each balance sheet line item. Then use the enclosed TRANSACTIONS AND ADDITIONAL INFORMATION to complete the General Journal, Ledger, Worksheet and Financial Statements for the second month of operations. Use the Perpetual Inventory method as discussed in class for all sales of merchandise.
Aggie Health and Fitness Center
Balance Sheet
As of August 31, 2016
Assets: Liabilities:
Cash $4,500 Accounts Payable $2,900
Accounts Receivable 6,500 Salaries Payable 5,600
Inventory â Concessions 1,100 Interest Payable 1,375
Supplies 400 Unearned Revenue 500
Prepaid Insurance 4,400 Note Payable 330,000
Total Current Assets 16,900 Total Current Liabilities 340,375
Land 80,000 Stockholderâs Equity
Building 408,000 Common Stock 245,500
Equipment 67,200 Retained Earnings 3,563
Furniture and Fixtures 20,016 Total Liab. and SHE $589,438
Accumulated Depreciation (2,678)
Total Assets $589,438
Fiscal Year
Aggie Health and Fitness Center was established as a business in August 2016. Aggie Health and Fitness Center follows a fiscal year end of July 31.
Inventories
Inventories consist of concessions available for resale to members. These concessions consist of energy drinks, nutritional supplements, etc. Inventories are valued on a first-in, first-out basis, using the perpetual method. (Note: The Center plans to expand its inventory during September to include logo-based apparel.)
Prepaid Insurance
Aggie Health and Fitness Center carries property insurance through Good Hands Insurance Co. The Center purchased a 12 month policy on August 1, 2016 for $4,800.
Fixed Assets
Property and Equipment are stated on the basis of historical cost.
Land and Building: The Land and Building was a group purchase made on August 1, 2016. The total purchase price amounted to $488,000. On the date of purchase the land was appraised at $80,000 and the building was appraised at $408,000. The Health and Fitness Center paid $158,000 down and signed a $330,000, 12-month, 5% note for the balance. Depreciation on the building is computed using the straight-line basis with no salvage value. The life of the building is estimated to be 20 years.
Equipment and Furniture and Fixtures: All equipment and furniture and fixtures were purchased for cash on August 1, 2016. Both equipment and furniture and fixtures are depreciated using the straight-line method of depreciation. No salvage value is anticipated. The useful life of the equipment is 8 years. The useful life of the furniture and fixtures is 6 years.
The book values of these assets are presented below:
Land $80,000 $80,000
Building 408,000
Less: Accumulated Depr 1,700 406,300
Equipment 67,200
Less: Accumulated Depr 700 66,500
Furniture and Fixtures 20,016
Less: Accumulated Depr 278 19,738
Net Plant, Property, and Equipment $572,538
Unearned Revenue
The balance in the unearned revenue account is due to the sale of gift certificates redeemable for massage therapy.
Revenue Recognition
The Company recognizes service revenue upon providing services for customers. Sales revenue is recognized upon customer receipt of goods. Revenue for gift certificate sales is recognized at redemption. (Note: all memberships sold during the first month of operations were for one month only).
Instructions
Use the following TRANSACTIONS AND ADDITIONAL INFORMATION to complete the General Journal, Ledger, Worksheet and Financial Statements for the second month of operations for Aggie Health & Fitness Center (The Fitness Center). Use the Perpetual Inventory method as discussed in class for all sales of merchandise.
| 11 | Sept 13 | The owners of the company invested an additional $18,000 into Aggie Health and Fitness Center in exchange for common stock |
| 12 | Sept 14 | Gift certificates totaling $300 were redeemed for massage therapy performed |
What are the journal entries for Transactions #11 and #12?
| A. |
| |||||||||
| B. |
| |||||||||
| C. |
| |||||||||
| D. |
|
| years | 2013 | 2014 | 2015 | 2016 |
|---|---|---|---|---|
| spar | 1,000000 | 2,000000 | 4,000000 | 8,000000 |
| nisa | 4,000000 | (1,000000) | 15,000000 | (3,000000) |
Based on the information above and the materials given about the topic, answer the following questions.
A. When you compare the profit of both companies, do you think there is earnings management? If so, in which company and which method of creative accounting that the company used to do earnings management.
B. Which firm do you think might be favoured by the stock market? Why.
In 2013 Spar company has only one asset, inventory, worth say £20,000000, then if the equity is £19,000000 and this yearâs profit is £1,000000. If the company could first, adopt more generous inventories valuation policy to decrease provisions for obsolete inventoriesi by £200,000. Second revaluate the value of the inventories based on market value not on book value to increase the inventories by 1,000000.
A. How is the balance sheet of the company looks like before and after adopting these polices?. 1.5 marks
B. Do you think by adopting these polices to decrease provisions for obsolete inventories and increase inventories effect the companyâs profit? Explain your answer using the calculation when it need it.
Nisa company in UK, where the tax system gives capital allowance (money deducted from the overall income tax). The tax year runs from 10th of April to 9th of April. The financial year of the company end was 30 of June. Tom is farmer and want to buy machine in March and wanted the machinery invoiced in in March, but would pay in August when the machine will be delivered.
A. Why do you think Tom wished to do this?
B. The manager of Nisa company accepted and decided to send the bill to the farmer Tom and record the transaction as revenue as soon as the bill has been sent. Why do you think the manager accept and decided to do revenue recognition in the way that he decided to do? Is there profit management here? explain your answer and show if there advantage and disadvantage of managerâs decision.
Assume that In 2014 Spar made profit of £2,000000 before deprecation. The company has £20,000000 worth of equipment. Currently it using the straight line method to depreciate its equipment over 10 years. However, the company is thinking to change its depreciation policy by to 20 years estimated useful life instead of 10 years.
A. Do you think this change will affect the companyâs profit? Explain your answer using the calculation to show the profit before and after the change. If there was effect on companyâs profit, what is the amount of the change.
B. After you finish analysing the case, now you need to conclude your assignment with the consequences of using creative accounting in managing the profits of companies.
Plus excel if possible
INSTRUCTIONS: PLEASE SELECT THE CORRECT ANSWER CHOICE
Use the following balance sheet information from Aggie Health and Fitness Centersâ month-end financial statements dated August 31, 2016 and open t-accounts for each balance sheet line item. Then use the enclosed TRANSACTIONS AND ADDITIONAL INFORMATION to complete the General Journal, Ledger, Worksheet and Financial Statements for the second month of operations. Use the Perpetual Inventory method as discussed in class for all sales of merchandise.
Aggie Health and Fitness Center
Balance Sheet
As of August 31, 2016
Assets: Liabilities:
Cash $4,500 Accounts Payable $2,900
Accounts Receivable 6,500 Salaries Payable 5,600
Inventory â Concessions 1,100 Interest Payable 1,375
Supplies 400 Unearned Revenue 500
Prepaid Insurance 4,400 Note Payable 330,000
Total Current Assets 16,900 Total Current Liabilities 340,375
Land 80,000 Stockholderâs Equity
Building 408,000 Common Stock 245,500
Equipment 67,200 Retained Earnings 3,563
Furniture and Fixtures 20,016 Total Liab. and SHE $589,438
Accumulated Depreciation (2,678)
Total Assets $589,438
Fiscal Year
Aggie Health and Fitness Center was established as a business in August 2016. Aggie Health and Fitness Center follows a fiscal year end of July 31.
Inventories
Inventories consist of concessions available for resale to members. These concessions consist of energy drinks, nutritional supplements, etc. Inventories are valued on a first-in, first-out basis, using the perpetual method. (Note: The Center plans to expand its inventory during September to include logo-based apparel.)
Prepaid Insurance
Aggie Health and Fitness Center carries property insurance through Good Hands Insurance Co. The Center purchased a 12 month policy on August 1, 2016 for $4,800.
Fixed Assets
Property and Equipment are stated on the basis of historical cost.
Land and Building: The Land and Building was a group purchase made on August 1, 2016. The total purchase price amounted to $488,000. On the date of purchase the land was appraised at $80,000 and the building was appraised at $408,000. The Health and Fitness Center paid $158,000 down and signed a $330,000, 12-month, 5% note for the balance. Depreciation on the building is computed using the straight-line basis with no salvage value. The life of the building is estimated to be 20 years.
Equipment and Furniture and Fixtures: All equipment and furniture and fixtures were purchased for cash on August 1, 2016. Both equipment and furniture and fixtures are depreciated using the straight-line method of depreciation. No salvage value is anticipated. The useful life of the equipment is 8 years. The useful life of the furniture and fixtures is 6 years.
The book values of these assets are presented below:
Land $80,000 $80,000
Building 408,000
Less: Accumulated Depr 1,700 406,300
Equipment 67,200
Less: Accumulated Depr 700 66,500
Furniture and Fixtures 20,016
Less: Accumulated Depr 278 19,738
Net Plant, Property, and Equipment $572,538
Unearned Revenue
The balance in the unearned revenue account is due to the sale of gift certificates redeemable for massage therapy.
Revenue Recognition
The Company recognizes service revenue upon providing services for customers. Sales revenue is recognized upon customer receipt of goods. Revenue for gift certificate sales is recognized at redemption. (Note: all memberships sold during the first month of operations were for one month only).
Instructions
Use the following TRANSACTIONS AND ADDITIONAL INFORMATION to complete the General Journal, Ledger, Worksheet and Financial Statements for the second month of operations for Aggie Health & Fitness Center (The Fitness Center). Use the Perpetual Inventory method as discussed in class for all sales of merchandise.
TRANSACTIONS:
| TRANSACTION # | DATE | TRANSACTION DESCRIPTION |
| 1 | Sept 1 | Purchased a 3-month advertising campaign to be broadcast on local radio stations during the months of September, October and November. Paid $1,500 in advance for this ad campaign. |
| 2 | Sept 1 | Sold 160, twelve-month memberships to the Fitness Center for $420 each. All membership dues were collected in cash. |
| 3 | Sept 2 | Purchased office supplies for $325 on an open account from Kelliâs Office Supplies. The Fitness Center has 30 days to pay for the supplies. |
| 4 | Sept 3 | Purchased on account a total of 180 shirts with an embroidered Aggie Health and Fitness Center logo from C & C Creations at a price of $14 per shirt. These shirts are available for resale to customers. |
| 5 | Sept 4 | Paid wages due to employees on August 31 |
| 6 | Sept 5 | Purchased flowers for the reception desk for $54 cash |
| 7 | Sept 6 | Purchased concessions for $5,200 on account from Advocare Distributing, Inc. These concessions consist of energy drinks, nutritional supplements, etc., and are available for resale to customers |
| 8 | Sept 7 | Provided 50 hours of personal training services to members. Fees are charged at a rate of $45 an hour. The total amount was billed to individual memberâs accounts |
| 9 | Sept 10 | Paid the total amounts due to Kelliâs Office Supplies for the Sept. 2 transaction and C&C Creations for the Sept. 3 transaction |
| 10 | Sept 12 | Sold thirty-five shirts to a corporate member, Allen & Associates for $36 each. Collected $500 in cash and the balance is owed to the Fitness Center on account |
| 11 | Sept 13 | The owners of the company invested an additional $18,000 into Aggie Health and Fitness Center in exchange for common stock |
| 12 | Sept 14 | Gift certificates totaling $300 were redeemed for massage therapy performed |
| 13 | Sept 15 | The concessions stand reported sales of merchandise for $5,400 for the first half of the month. The concessions that were sold had an original cost of $2,320. All of these transactions were billed directly to each memberâs account |
| 14 | Sept 15 | For the first half of September, provided 22 hours of massage therapy at a rate of $75/hour. Billed the individual membersâ accounts for services provided |
| 15 | Sept 16 | Received $6,775 for services previously billed to customerâs accounts |
| 16 | Sept 16 | Paid wages and salaries of $4,700 to Aggie Health and Fitness Center employees |
| 17 | Sept 17 | Purchased on account additional concessions for $2,100 from Advocare Distributing |
| 18 | Sept 20 | Paid $5,680 on accounts payable |
| 19 | Sept 21 | Collected the balance of what was owed on account from Allen & Associates for the Sept. 12 transaction |
| 20 | Sept 22 | Sold forty-seven shirts to individual customers for $40 each. Collected 30% in cash, the balance is owed to Aggie Health and Fitness Center on account |
| 21 | Sept 23 | Received a utility bill that totaled $535 for the month. It is due October 12 |
| 22 | Sept 24 | Sold a gift certificate for $100 cash. The gift certificate is valid for one year and is redeemable for a 60 -minute massage |
| 23 | Sept 26 | Cash sales of shirts: 30 shirts sold at $40 each |
| 24 | Sept 27 | Aggie Health and Fitness Center paid a dividend of $4,000 to its shareholders |
| 25 | Sept 28 | Received $4,225 for services previously billed to customersâ accounts |
| 26 | Sept 29 | Purchased additional equipment for $28,000; paid $5,000 in cash and signed a two year, 4% note for the balance |
| 27 | Sept 29 | Fees for massage therapy for the last half of September totaled $4,900. All of these transactions were collected in cash. Fees for personal training given during the last half of September amounted to $7,200. Fifty percent of the personal training fees were collected in cash |
| 28 | Sept 30 | âCredit sales for concessions during the last half of September totaled $1,900. âCash sales for concessions during the last half of September totaled $480. âCost of the concessions sold during the last half of September was $1,015 |
ADDITIONAL INFORMATION:
1.Depreciation expense for the month of September should be calculated using the straight-line method.
2.At the end of the month, a physical count was taken of the Fitness Centerâs inventories.
It revealed the following information:
a.Sixty of the shirts for resale were on hand at September 30.
b.Concession merchandise still on hand as of September amounted to $4,990.
3. Salaries earned by employees but unpaid on September 30 totaled $5,115.
4. Office Supplies still on hand on September totaled $100.
What is the correct adjusting journal entry for Insurance Expense/Prepaid Insurance?
| A. |
| |||||
| B. |
| |||||
| C. |
| |||||
| D. |
|
What is the correct adjusting journal entry for Interest Expense/Interest Payable?
| A. |
| |||||
| B. |
| |||||
| C. |
| |||||
| D. |
|
