ACCT1501 Chapter Notes - Chapter 9-10: European Cooperation In Science And Technology
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24 May 2018
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Inventory & Non-Current Assets
Inventory Control Systems:
- Perpetual System: Maintains continuous records on the flow of units of inventory for all
transactions
Balances for inventory and COGS = always in the accounting system
Easy to identify shortage of inventory
➢ Beginning inventory + Inventory acquired during the period - COGS = Ending inventory
cost
➢ Dr Inventory Shortages Expense
Cr Inventory
➢ Pros: Better Internal Control, Stock losses/ shortage of inventory are easily determined
Cons: COSTLY
➢ Purchases (Journal Entry)
Dr Inventory
Cr Cash
➢ Sales of Inventory
Dr Cash/Receivable
Cr Sales
Dr COGS
Cr Inventory
- Perpetual System: Determines inventory by physical count AT THE END of the period and
COGS is determined as – COGS = Opening Inv + Purchases – Closing Inv
➢ Balances for inventory and COGS in the accounting system AT PERIOD END
➢ Shortage of inventory is IGNORED
➢ Sales (Journal Entry)
Dr Cash/ Receivable
Cr Sales
- Inventory – Measurement Rule
➢ Lower of cost and net realizable value
COST of purchase:
➢ ADD: Purchase price + Import duties and other taxes + Inward transport and handling
costs + Any other directly attributable costs of acquisition
➢ LESS: Trade discounts, rebates, similar items
Conversion Costs – if inventories are manufactured and includes cost of production
(Exclude admin, selling and storage costs)
- Cost Flow Assumption
FIFO
➢ First units purchased = first units sold
➢ HIGHER profit level in times of rising prices (relative to LIFO and weighted av)
➢ Higher Ending Inventory, Lower COGS
➢ Closing inventory balance CLOSER to current cost
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Document Summary
Perpetual system: maintains continuous records on the flow of units of inventory for all transactions. Balances for inventory and cogs = always in the accounting system. Beginning inventory + inventory acquired during the period - cogs = ending inventory cost. Pros: better internal control, stock losses/ shortage of inventory are easily determined. Perpetual system: determines inventory by physical count at the end of the period and. Cogs is determined as cogs = opening inv + purchases closing inv. Balances for inventory and cogs in the accounting system at period end. Lower of cost and net realizable value. Add: purchase price + import duties and other taxes + inward transport and handling costs + any other directly attributable costs of acquisition. Conversion costs if inventories are manufactured and includes cost of production (exclude admin, selling and storage costs) First units purchased = first units sold. Higher profit level in times of rising prices (relative to lifo and weighted av)
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| . Make all 16 adjustments to journal entries. Remember to include a description under each journal entry. |
| 1 | On March 1, ABC purchased a one-year liability insurance policy for $98,400. | ||||||||
| Upon purchase, the following journal entry was made: | |||||||||
| Dr Prepaid insurance | 98,400 | ||||||||
| Cr Cash | 98,400 | ||||||||
| The expired portion of insurance must be recorded as of 12/31/14. | |||||||||
| Notice that the expired portion from March through November has been recorded already. | |||||||||
| Make sure that the Prepaid Insurance balance after the adjusting entry is correct. | |||||||||
| 2 | Depreciation expense must be recorded for the month of December. | ||||||||
| The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000. | |||||||||
| The method of depreciation for the building is straight-line. | |||||||||
| The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000. | |||||||||
| The method of depreciation for the equipment is double-declining balance. | |||||||||
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| 3 | On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month, | ||||||||
| and XYZ paid ABC on December 1 in advance for the first three months' rent. | |||||||||
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| Cr Unearned rent revenue | 36,000 | ||||||||
| The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14. | |||||||||
| 4 | Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours. | ||||||||
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| Dr Cash | 235,000 | ||||||||
| Cr Notes payable | 235,000 | ||||||||
| On February 28, 2015 ABC must pay the bank the amount borrowed plus interest. | |||||||||
| Assume the beginning balance for Notes Payable is correct. | |||||||||
| Interest through 12/31/14 must be accrued on the $235,000 note. | |||||||||
| 6 | ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete | ||||||||
| physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at | |||||||||
| that time totaled $75,000, which reflects historical cost. | |||||||||
| Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment. | |||||||||
| Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. | |||||||||
| A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of | |||||||||
| completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory | |||||||||
| using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting | |||||||||
| for adjustments of inventory to market value. | |||||||||
| 7 | It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized | ||||||||
| that their intangible asset might be impaired on December 31, 2014. Record the impairment if any. | |||||||||
| The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500. | |||||||||
| 8 | On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury | ||||||||
| stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14, | |||||||||
| ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock. | |||||||||
| 9 | On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry | ||||||||
| to reflect the issuance of the stock on 12/31/14. | |||||||||
| 10 | On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are | ||||||||
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| amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14. | |||||||||
| Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense. | |||||||||
| 11 | The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies. | ||||||||
| Securities | Cost | Fair Value | |||||||
| 2,200 shares of Toyota Corporation Common Stock | $ 100,000 | $ 125,000 | |||||||
| 1,100 shares of G.M. Corporation Common Stock | $ 67,000 | $ 34,000 | |||||||
| $ 167,000 | $ 159,000 | ||||||||
| Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. | |||||||||
| 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. | |||||||||
| Answers to the 30multiple choice questions | 2 points each, 30questions, for 60 point total | ||||||||||
| 60 points | |||||||||||
| < please record | 1) | From an internal control standpoint, the asset mostsusceptible to improper diversion and use is | |||||||||
| answer here | a. | prepaid insurance. | |||||||||
| b. | cash. | ||||||||||
| c. | Equipment | ||||||||||
| d. | Investments | ||||||||||
| 2) | Jolene is warehouse custodian and alsomaintains the accounting record of the inventory held at thewarehouse. An assessment of this situation indicates | ||||||||||
| a. | documentation procedures are violated. | ||||||||||
| b. | independent internal verification is violated. | ||||||||||
| c. | segregation of duties is violated. | ||||||||||
| < please record | d. | establishment of responsibility is violated. | |||||||||
| answer here | |||||||||||
| 3) | Internal control is defined, in part, as a planthat safeguards | ||||||||||
| a. | all balance sheet accounts. | ||||||||||
| b. | assets. | ||||||||||
| c. | liabilities. | ||||||||||
| d. | capital stock. | ||||||||||
| 4) | The control principle related to nothaving the same person authorize and pay for goods is known as | ||||||||||
| a. | establishment of responsibility. | ||||||||||
| b. | independent internal verification. | ||||||||||
| < please record | c. | segregation of duties. | |||||||||
| answer here | d. | rotation of duties. | |||||||||
| 5) | Two individuals at a retail store work thesame cash register. You evaluate this situation as | ||||||||||
| a. | a violation of establishment of responsibility. | ||||||||||
| b. | a violation of segregation of duties. | ||||||||||
| c. | supporting the establishment of responsibility. | ||||||||||
| < please record | d. | supporting internal independent verification. | |||||||||
| answer here | |||||||||||
| 6) | Having different individuals receive cash,record cash receipts, and hold the cash is an example of | ||||||||||
| a. | establishment of responsibility. | ||||||||||
| b. | segregation of duties. | ||||||||||
| c. | documentation procedures. | ||||||||||
| d. | independent internal verification. | ||||||||||
| 7) | An adjusting entry is not required for | ||||||||||
| a. | outstanding checks. | ||||||||||
| b. | collection of a note by the bank. | ||||||||||
| c. | NSF checks. | ||||||||||
| d. | bank service charges. | ||||||||||
| 8) | If a check correctly written and paid bythe bank for $591 is incorrectly recorded on the company's booksfor $519, | ||||||||||
| the appropriate treatment on the bankreconciliation would be to | |||||||||||
| a. | deduct $72 from the book's balance. | ||||||||||
| b. | add $72 to the book's balance. | ||||||||||
| c. | deduct $72 from the bank's balance. | ||||||||||
| d. | deduct $591 from the book's balance. | ||||||||||
| 9) | During 2013, Parker Enterprises generatedrevenues of $60,000. The company's expenses were as follows: | ||||||||||
| cost of goods sold of $30,000, operatingexpenses of $12,000 and a loss on the sale of equipment of$2,000. | |||||||||||
| Parker's gross profit is: | |||||||||||
| a. | $16,000.00 | ||||||||||
| b. | $18,000.00 | ||||||||||
| c. | $30,000.00 | ||||||||||
| d. | $60,000.00 | ||||||||||
| 10) | A primary difference between a periodicand perpetual inventory system is that a periodic system: | ||||||||||
| a. | determines the inventory on hand only at the end ofthe accounting period. | ||||||||||
| b. | provides better control over inventories. | ||||||||||
| c. | records the cost of goods sold after each saletransaction. | ||||||||||
| d. | keeps a record showing the merchandise inventory onhand at all times. | ||||||||||
| 11) | A decline in a company's gross profitcould be caused by all of the following except: | ||||||||||
| a. | selling products using a lower markup. | ||||||||||
| b. | clearance of discontinued inventory. | ||||||||||
| c. | paying lower prices to its suppliers. | ||||||||||
| d. | increasing competition resulting in a lower sellingprice. | ||||||||||
| 12) | South Company uses the perpetual inventorysystem. South's goods in transit at December 31 include: | ||||||||||
| Sales made by South | Purchases made by South | ||||||||||
| (1) FOB destination | (3) FOB destination | ||||||||||
| (2) FOB shipping point | (4) FOB shipping point | ||||||||||
| Which itemsshould be included in South's inventory at December 31? | |||||||||||
| a. (2) and (3) | |||||||||||
| b. (1) and (4) | |||||||||||
| c. (1) and (3) | |||||||||||
| d. (2) and (4) | |||||||||||
| 13) | In periods of rising prices, the inventorymethod which results in the greatest net income is the: | ||||||||||
| a. | LIFO method. | ||||||||||
| b. | FIFO method. | ||||||||||
| c. | Weighted Average method. | ||||||||||
| d. | Lower of Cost or Market method. | ||||||||||
| 14) | The following information was available for RawleyCompany at December 31, 2008: | ||||||||||
| inventory (Jan .01) $80,000; inventory (Dec. 31)$120,000; cost of goods sold $600,000; | |||||||||||
| accounts receivable $73,000; and sales$900,000. | |||||||||||
| Rawley's inventory turnover in 2008 was: | |||||||||||
| a. | 9.00 times. | ||||||||||
| b. | 7.50 times. | ||||||||||
| c. | 6.00 times. | ||||||||||
| d. | 5.00 times. | ||||||||||
| 15) | A petty cash fund of $200 is replenishedwhen the fund contains $5 in cash and receipts for $193. | ||||||||||
| The entry to replenish the fund would: | |||||||||||
| a. | credit Cash Over and Short for $2. | ||||||||||
| b. | credit Miscellaneous Revenue for $2. | ||||||||||
| c. | debit Cash Over and Short for $2. | ||||||||||
| d. | debit Miscellaneous Expense for $2. | ||||||||||
| 16) | An item is considered material if | ||||||||||
| a. | it doesn't costs a lot of money. | ||||||||||
| b. | it is of a tangible good intended for re-sale. | ||||||||||
| c. | it is likely to influence the decision of aninvestor or creditor. | ||||||||||
| d. | the cost of reporting the item is greater than itsbenefits. | ||||||||||
| 17) | Receivables might be sold to | ||||||||||
| a. lengthen the cash-to-cash operating cycle. | |||||||||||
| b take advantage of deep discounts on the cashrealizable value of receivables. | |||||||||||
| c. generate cash quickly. | |||||||||||
| d. finance companies at an amount greater than cashrealizable value. | |||||||||||
| 18) | If the amount of uncollectible accountexpense is understated at year end: | ||||||||||
| a. | net income will be understated. | ||||||||||
| b. | stockholders' equity will be understated. | ||||||||||
| c. | allowance for doubtful accounts will be overstated. | ||||||||||
| d. | net accounts receivable will be overstated. | ||||||||||
| 19) | A debit balance in the Allowance for DoubtfulAccounts | ||||||||||
| a. | is the normal balance for that account. | ||||||||||
| b. | indicates that actual bad debt write-offs haveexceeded previous provisions for bad debts. | ||||||||||
| c. | indicates that actual bad debt write-offs have beenless than what was estimated. | ||||||||||
| d. | cannot occur if the percentage of sales method ofestimating bad debts is used. | ||||||||||
| 20) | Bad Debts Expense is considered | ||||||||||
| a. | an avoidable cost in doing business on a credit basis. | ||||||||||
| b. | an internal control weakness. | ||||||||||
| c. | a necessary risk of doing business on a credit basis. | ||||||||||
| d. | avoidable unless there is a recession. | ||||||||||
| 21) | The best managed companies will have | ||||||||||
| a. | no uncollectible accounts. | ||||||||||
| b. | a very strict credit policy. | ||||||||||
| c. | a very lenient credit policy. | ||||||||||
| d. | some accounts that will prove to be uncollectible. | ||||||||||
| 22) | Two methods of accounting for uncollectibleaccounts are the | ||||||||||
| a. | allowance method and the accrual method. | ||||||||||
| b. | allowance method and the net realizable method. | ||||||||||
| c. | direct write-off method and the accrual method. | ||||||||||
| d. | direct write-off method and the allowance method. | ||||||||||
| 23) | When the allowance method of accountingfor uncollectible accounts is used, Bad Debts Expense isrecorded | ||||||||||
| a. | in the year after the credit sale is made. | ||||||||||
| b. | in the same year as the credit sale. | ||||||||||
| c. | as each credit sale is made. | ||||||||||
| d. | when an account is written off as uncollectible. | ||||||||||
| 24) | Allowance for Doubtful Accounts on the balancesheet | ||||||||||
| a. | is offset against total current assets. | ||||||||||
| b. | increases the cash realizable value of accountsreceivable. | ||||||||||
| c. | appears under the heading "Other Assets." | ||||||||||
| d. | is offset against accounts receivable. | ||||||||||
| 25) | In reviewing the accounts receivable, thecash realizable value is $14,000 before the write-off of a $1,500account. | ||||||||||
| What is the cash realizable value after thewrite-off? | |||||||||||
| a. | $1,500 | ||||||||||
| b. | $12,500 | ||||||||||
| c. | $14,000 | ||||||||||
| d. | $15,500 | ||||||||||
| 26) | The maturity value of a $60,000, 10%, 60-day notereceivable dated July 3 is | ||||||||||
| a. | $60,000 | ||||||||||
| b. | $61,000 | ||||||||||
| c. | $66,000 | ||||||||||
| d. | $70,000 | ||||||||||
| 27) | The interest on a $10,000, 10%, 1-year notereceivable is | ||||||||||
| a. | $1,000 | ||||||||||
| b. | $10,000 | ||||||||||
| c. | $10,100 | ||||||||||
| d. | $11,000 | ||||||||||
| 28) | The maturity value of a $60,000, 8%, 3-month notereceivable is | ||||||||||
| a. | $60,400 | ||||||||||
| b. | $60,480 | ||||||||||
| c. | $61,200 | ||||||||||
| d. | $64,800 | ||||||||||
| 29) | Notes receivable are recorded in the accounts at | ||||||||||
| a. | cash (net) realizable value. | ||||||||||
| b. | face value. | ||||||||||
| c. | gross realizable value. | ||||||||||
| d. | maturity value. | ||||||||||
| 30) | Which of the following are also called tradereceivables? | ||||||||||
| a. | Accounts receivable | ||||||||||
| b. | Other receivables | ||||||||||
| c. | Advances to employees | ||||||||||
| d. | Income taxes refundable | ||||||||||
