The Car Company uses the accrual basis of accounting. The company is having a poor year financially. In September, 2012, the company paid $3 million for advertisements that will run during the World Series in September and October of 2012. The bonus of the CEO is based on net income with a maximum bonus of $200,000. The CEO wants the accountant to record the advertising as prepaid advertising since he feels strongly that the advertising will benefit the company in both 2012 and 2013. This way, the expenses for 2012 will be reduced and he may still be able to get his 2012 bonus. How and when should the company record the advertisement? What principle is used to determine when the expense should be recorded?
The Car Company uses the accrual basis of accounting. The company is having a poor year financially. In September, 2012, the company paid $3 million for advertisements that will run during the World Series in September and October of 2012. The bonus of the CEO is based on net income with a maximum bonus of $200,000. The CEO wants the accountant to record the advertising as prepaid advertising since he feels strongly that the advertising will benefit the company in both 2012 and 2013. This way, the expenses for 2012 will be reduced and he may still be able to get his 2012 bonus. How and when should the company record the advertisement? What principle is used to determine when the expense should be recorded?
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Related questions
Question 16
Corresponds to CLO 3(d) Hemmingway Corporation paid salaries of$5,000 and advertising expense of $2,000. Which of the followingjournal entries correctly records these expenses?
Debit: Cash $7,000 | ||
Debit: Salaries/Wages Expense$5,000 | ||
Debit: Salaries/Wages Expense$5,000 | ||
Debit: Salaries/Wages Expense$5,000 |
3 points
Question 17
Corresponds to CLO 4(a) Which of the following statements iscorrect regarding accrued revenues and unearned revenues, beforeadjusting entries have been made?
Accrued revenues have not been earned and unearned revenues havebeen earned. | ||
Accrued revenues have been paid and unearned revenues havenot. | ||
Accrued revenues have not been recorded and unearned revenueshave been recorded. | ||
Accrued revenues have been recorded and unearned revenues havebeen recorded. |
3 points
Question 18
Corresponds to CLO 4(b) Hudson Law Corporation received $5,500cash for legal services to be rendered in the future. The fullamount was credited to the liability account Unearned ServiceRevenue. At the end of the period, Hudson determines that $3,000 ofthe legal services have been rendered. The appropriate adjustingjournal entry to be made at the end of the period is:
debit Unearned Service Revenue, $3,000; credit Cash, $3,000. | ||
debit Unearned Service Revenue, $3,000; credit Service Revenue,$3,000. | ||
debit Unearned Service Revenue, $2,500; credit Service Revenue,$2,500. | ||
debit Service Revenue, $2,500; credit Unearned Service Revenue,$2,500. |
3 points
Question 19
Corresponds to CLO 4(c) Ace Corporation purchased officesupplies costing $13,000 and debited Office Supplies for the fullamount. At the end of the accounting period, a physical count ofoffice supplies revealed $2,700 still on hand. The appropriateadjusting journal entry to be made at the end of the period is:
debit Office Supplies Expense, $10,300; credit Office Supplies,$10,300. | ||
debit Office Supplies, $10,300; credit Office Supplies Expense,$10,300. | ||
debit Office Supplies Expense, $2,700; credit Office Supplies,$2,700. | ||
debit Office Supplies, $2,700; credit Office Supplies Expense,$2,700. |
3 points
Question 20
Corresponds to CLO 4(d) On September 1, Northgate paid $18,000to Evans Management Company for 12 months of rent beginning onSeptember 1. The appropriate journal entry was made to record thistransaction. If financial statements are prepared for the 9 monthsended September 30, the adjusting entry to be made by Northgateis:
debit Rent Expense, $13,500; credit Prepaid Rent, $13,500. | ||
debit Prepaid Rent, $1,500; credit Rent Revenue, $1,500. | ||
debit Prepaid Rent, $1,500; credit Rent Expense, $1,500. | ||
debit Rent Expense, $1,500; credit Prepaid Rent, $1,500. |
3 points
Question 21
Corresponds to CLO 5(a) Lennox Corporation purchased a newdelivery truck for 35,000. The sales taxes are $2,700. The logo ispainted on the side of the truck for $800. The truck's annuallicense is $200. Annual insurance on the truck is $1,300. Whatshould Lennox record as the cost of the new truck?
$40,000 | ||
$38,500 | ||
$37,700 | ||
$35,000 |
3 points
Question 22
Corresponds to CLO 5(b) On April 1, 2013, Ballard Corporationpurchased equipment for $65,000. It is estimated that the equipmentwill have a $5,000 salvage value at the end of its 5 year usefullife. If Ballard uses the straight-line method of depreciation,what is the accumulated depreciation at December 31, 2013?
$13,000 | ||
$12,000 | ||
$9,750 | ||
$9,000 |
3 points
Question 23
Corresponds to CLO 5(c) Tyree Company purchased equipment with acost of $90,000 and an estimated salvage value of $18,000. Theequipment is expected to produce 150,000 units over its estimateduseful life of 10 years. If Tyree uses the units-of-activitymethod, what is the depreciation cost per unit to be used incalculating depreciation?
$1.67 | ||
$0.48 | ||
$2.08 | ||
$0.60 |
3 points
Question 24
Corresponds to CLO 5(d) Kerns Company purchased equipment with acost of $200,000 and an estimated salvage value of $10,000. Theequipment has an estimated useful life of 10 years. If Kerns usesthe double-declining balance method, what is the annualdepreciation rate to be used in calculating depreciation?
5% | ||
10% | ||
20% | ||
40% |
3 points
Question 25
Corresponds to CLO 6(a) Marshall Machinery made a sale for$150,000 on March 31. The customer is sent a statement on April 6and payment is received on April 15. Marshall prepares March'smonthly internal financial statements on April 20. Marshall followsGAAP and applies the revenue recognition principle. When is the$150,000 considered to be earned?
March 31 | ||
April 6 | ||
April 15 | ||
April 20 |
Chester & Wayne is a regional food distribution company. Mr.Chester, CEO, has asked your assistance in preparing cash-flowinformation for the last three months of this year. Selectedaccounts from an interim balance sheet dated September 30, have thefollowing balances:
Cash: $142,100
Accounts payable $354,155
Marketable securities: 200,000
Other payables 53,200
Accounts receivable: 1,012,500
Inventories: 150,388
Mr. Wayne, CFO, provides you with the following informationbased on experience and management policy. All sales are creditsales and are billed the last day of the month of sale. Customerspaying within 10 days of the billing date may take a 2 percent cashdiscount. Forty percent of the sales is paid within the discountperiod in the month following billing. An additional 25 percentpays in the same month but does not receive the cash discount.Thirty percent is collected in the second month after billing; theremainder is uncollectible. Additional cash of $24,000 is expectedin October from renting unused warehouse space.
Sixty percent of all purchases, selling and administrativeexpenses, and advertising expenses is paid in the month incurred.The remainder is paid in the following month. Ending inventory isset at 25 percent of the next month's budgeted cost of goods sold.The company's gross profit averages 30 percent of sales for themonth. Selling and administrative expenses follow the formula of 5percent of the current month's sales plus $75,000, which includesdepreciation of $5,000. Advertising expenses are budgeted at 3percent of sales.
Actual and budgeted sales information is as follows:
Actual:
August: $750,000 & September: 787,500
Budgeted: October: $826,800, November: 868,200,December: 911,600, January: 930,000
The company will acquire equipment costing $250,000 cash inNovember. Dividends of $45,000 will be paid in December.
The company would like to maintain a minimum cash balance at theend of each month of $120,000. Any excess amounts go first torepayment of short-term borrowings and then to investment inmarketable securities. When cash is needed to reach the minimumbalance, the company policy is to sell marketable securities beforeborrowing.
1.Preparea cash budget for each month of the fourth quarter and for thequarter in total. Prepare supporting schedules as needed. (Roundall budget scheduleamounts to the nearest dollar.)
2.You meet with Mr. Chester and Mr. Wayne to present your findingsand happen to bring along your PC with the budget model software.They are worried aboutyour findings in Part 1. They have obviously been arguing overcertain assumptions you were given.
3.Mr. Wayne thinks that the gross margin may shrink to 27.5 percentbecause of higher purchase prices. He is concerned about whatimpact this will haveon borrowings. Comment.
4.Mr. Chester thinks that "stock outs" occur too frequently and wantsto see the impact of increasing inventory levels to 30 and 40percent of next quarter'ssales on their total investment. Comment on these changes.
5.Mr. Wayne wants to discontinue the cash discount for promptpayment. He thinks that maybe collections of an additional 20percent of sales will be delayedfrom the month of billing to the next month. Mr. Chester says"That's ridiculous! We should increase the discount to 3 percent.Twenty percent more wouldbe collected in the current month to get the higher discount."Comment on the cash-flow impacts.
*******************************INSTRUCTOR GUIDANCE THAT ISTHROWING ME OFF******************************
I have noticedthat a number of people are getting stuck on the Purchases amountto include in the Accounts Payable/Payments calculation. Here is alittle template to follow for Purchases: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Oct | Nov | Dec | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COGS (70% x Sales) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
+ Ending Inventory (25% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of nextmonth's COGS) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EQUALS Total Available | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Beginning Inventory | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EQUALS Purchases | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Here is a little table thatmight help. I populated October's amounts. Note, the $730,575 isthe amount of collections for Oct that you enter into the templateI provided: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Budgeted collections ofsales: | October | November | December | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash receipts: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From prior month withdiscount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(98% x 40% xprior month sales) $308,700 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From prior month withoutdiscount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(25% x priormonth sales) 196,875 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From second prior month | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(30% x secondprior month sales) 225,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Totalcollections $730,575 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discounts given (2% x sales x40%) $6,300 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In an effort to help get youstarted with the Week 4 Assignment, I drafted a set of steps foryou to follow. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Let's look at October. Thebeginning balance of cash for October that I provided in the Wordtemplate in the amount of $142,100 is the ending balance of cashfor September. That is your starting point. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
First, you take that numberand add cash receipts (receivables collections and rent income) toget the Total Cash Available I gave of $896,675. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Second, you deduct all thevarious disbursements of cash (i.e. outflows) to arrive at theamount of cash before loans and investments that I provided of$837,225. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finally, you add the cashreceived from any sale of investments and loans taken out, ifnecessary, to arrive at the desired ending cash balance of$120,000.
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