Determine whether each of the following actions in buying, selling, and accounting for inventories is ethical or unethical. Give your reason for each answer. 1. In applying the lower-of-cost-or-market rule to inventories, Blue Mountain Coffee Company recorded an excessively low value for its ending inventory (below both cost and market). This action allowed the company to pay less income tax for the year. 2. Rosalind Sales, Inc., delayed the purchase of inventory until after December 31, 2016, to keep 2016’s cost of goods sold from growing too large. The delay in purchasing inventory helped net income of 2016 to reach the level of profit demanded by the company’s investors. 3. Carlson Pharmaceuticals purchased a large amount of inventory shortly before year-end to increase the LIFO cost of goods sold and decrease reported income for the year. 4. Glacier Corporation deliberately overstated purchases to produce a high figure for cost of goods sold (low amount of net income). The real reason was to decrease the company’s income tax payments to the government. 5. Farley Sales Company deliberately overstated ending inventory in order to report higher profits (net income).
> Helio Ward (HW) owns vast amounts of corporate bonds. Suppose that on June 30, 2016, HW buys $1,300,000 of Amexon bonds at a price of 103. The Amexon bonds pay cash interest semiannually on June 30 and December 31 at the annual rate of 5% and mature at t
> Using the data from S8-5, make the adjusting entries that Sunshine Pools would need to make on December 31, 2016, related to the investment in BHT bonds. How would the bonds be reported on Sunshine Pools’ balance sheet as of December 31, 2016? What amoun
> Sunshine Pools purchased $100,000 of 12% BHT bonds on January 1, 2016, at a price of 107.5 when the market rate of interest was 10%. Sunshine intends to hold the bonds until their maturity date of January 1, 2021. The bonds pay interest semiannually on e
> Using the data from S8-2, make the adjusting entry that Broadbent Insurance would need to make on December 31, 2016, related to the investment in DGM bonds. How would the bonds be reported on Broadbent Insurance’s balance sheet as of December 31, 2016? W
> Using the data from S8-2, calculate the amount of discount amortization (using the straight-line amortization method) on July 1, 2016, and record the related journal entry. What is the total interest revenue for the first six months of 2016? From S8-2 B
> Chaplin Leasing leased a car to a customer. Chaplin will receive $150 a month for 60 months. 1. What is the present value of the lease if the annual interest rate in the lease is 12%? Use the PV function in Excel to compute the present value. 2. What i
> Calculate the present value of the following amounts: 1. $12,000 at the end of five years at 10% 2. $12,000 a year at the end of the next five years at 10%
> Broadbent Insurance purchased $100,000 of 5.5% DGM bonds on January 1, 2016, at a price of 90 when the market rate of interest was 8%. Broadbent intends to hold the bonds until their maturity date of January 1, 2021. The bonds pay interest semiannually o
> Excerpts from The Ink Spot Company statement of cash flows, as adapted, appear as follows: As the chief executive officer of The Ink Spot Company, your duty is to write the management letter to your stockholders explaining Ink Spotâ
> Companies divide their cash flows into three categories for reporting on the cash flow statement. 1. List the three categories of cash flows in the order they appear on the cash flow statement. Which category of cash flows is most closely related to this c
> Two accounts that arise from consolidation accounting are goodwill and noncontrolling interest. 1. What is goodwill, and how does it arise? Which company reports goodwill, the parent or the subsidiary? Where is goodwill reported? 2. What is noncontrolli
> Answer these questions about consolidation accounting: 1. Define “parent company.” Define “subsidiary company.” 2. How do consolidated financial statements differ from the financial statements of a single company? 3. Which company’s name appears on th
> Use the data given in S8-14. Assume that on January 1, 2017, Eastern Motors sold half its investment in Tripp Motors. The sale price was $125 million. Compute Eastern Motors’ gain or loss on the sale. From S8-14 Suppose on January 1, 2016, Eastern Moto
> Suppose on January 1, 2016, Eastern Motors paid $430 million for a 30% investment in Tripp Motors. Assume Tripp earned net income of $80 million and declared and paid cash dividends of $40 million during 2016. 1. What method should Eastern Motors use to
> Use the data given in S8-12. On May 21, 2017, Hilton Company sold its investment in Microscape Co. stock for $30 per share. 1. Journalize the sale. No explanation is required. 2. How does the gain or loss that you recorded here differ from the gain or lo
> Hilton Company completed these long-term available-for-sale investment transactions during 2016: 1. Journalize Hilton Company’s investment transactions. Explanations are not required. 2. Assume the Microscape Co. stock is Hilton Comp
> Use the data from S8-9 and S8-10 for this exercise. Williams Company sells its entire investment in American Express common stock on November 22, 2017, for a total of $74,500. Record the entries for the sale. From S8-10 Use the data from S8-9 for this
> Use the data from S8-9 for this exercise. At year-end on December 31, 2016, the American Express common stock that Williams Company holds has a quoted market price of $84.16 per share. Assuming that Williams Company has no other investments, record the e
> On January 1, 2016, Midtown Industries purchased $10,000 of 5% BRS bonds at a price of 100 (par.) Midtown intends to hold the bonds until their maturity date of January 1, 2021. The bonds pay interest semiannually on each January 1 and July 1. Record the
> Lovell, Inc., purchased a used van for use in its business on January 1, 2015. It paid $13,000 for the van. Lovell expects the van to have a useful life of four years, with an estimated residual value of $1,000 at the end of the four years. Lovell expect
> Dazzle, Inc., purchased a new car for use in its business on January 1, 2015. It paid $25,000 for the car. Dazzle expects the car to have a useful life of four years with an estimated residual value of zero at the end of the four years. Dazzle expects to
> Dazzle, Inc., purchased a new car for use in its business on January 1, 2015. It paid $25,000 for the car. Dazzle expects the car to have a useful life of four years with an estimated residual value of zero at the end of the four years. Dazzle expects to
> Dazzle, Inc., purchased a new car for use in its business on January 1, 2015. It paid $25,000 for the car. Dazzle expects the car to have a useful life of four years with an estimated residual value of zero at the end of the four years. Dazzle expects to
> This exercise uses the QuickAir data from S7-4. Assume QuickAir is trying to decide which depreciation method to use for income tax purposes. The company can choose from among the following methods: a. straight-line, b. units-of-production, or c. doub
> Assume that at the beginning of 2015 QuickAir purchased a used Jumbo 747 aircraft at a cost of $56,700,000. QuickAir expects the plane to remain useful for five years (5,000,000 miles) and to have a residual value of $4,700,000. QuickAir expects to fly t
> Identify each of the following items as either a capital expenditure (C), expense on the income statement (E), or neither (N): Type of Expenditure (C, E, or N) Transaction 1. Paid property taxes of $75,000 for the first year the new building is occu
> During 2016, Northwest Satellite Systems, Inc., purchased two other companies for $13 million in cash. Also during 2016, Northwest made capital expenditures of $11.3 million in cash to expand its market share. During the year, Northwest sold its North Am
> Pittsfield Sound Center pays $330,000 for a group purchase of land, building, and equipment. At the time of acquisition, the land has a current market value of $54,000, the building’s current market value is $90,000, and the equipment’s current market va
> Oswald Optical, Inc., provides a full line of designer eyewear to optical dispensaries. Oswald reported the following information for 2016 and 2015: Compute return on assets (ROA) for 2016 and 2015. Using the DuPont model, identify the components and s
> In 2016, Amici, Inc., reported $800 million in sales, $33 million in net income, and average total assets of $300 million. What is Amici’s return on assets in 2016?
> For each of the following scenarios, indicate whether a long-term asset has been impaired (Y for yes and N for no) and, if so, the amount of the loss that should be recorded. Impaired? Amount (Y or N) Estimated Future Asset Book Value Cash Flows Fai
> Crunchies, Inc., dominates the snack-food industry with its Salty Chip brand. Assume that Crunchies, Inc., purchased Healthy Snacks, Inc., for $5.8 million cash. The market value of Healthy Snacks’ assets is $7 million, and Healthy Snacks has liabilities
> BB Petroleum, a giant oil company, holds reserves of oil and gas assets. At the end of 2016, assume the cost of BB Petroleum’s oil reserves totaled $208 billion, representing 16 billion barrels of oil in the ground. 1. Which depreciation method is simil
> On January 1, 2015, Global Manufacturing purchased a machine for $920,000 that it expected to have a useful life of five years. The company estimated that the residual value of the machine was $70,000. Global Manufacturing used the machine for two years
> Happy Times Amusement Park paid $180,000 for a concession stand. Happy Times started out depreciating the building using the straight-line method over ten years with zero residual value. After using the concession stand for three years, Happy Times deter
> Assume that on September 30, 2015, LuxAir, an international airline based in Germany, purchased a Jumbo aircraft at a cost of €42,500,000 (€ is the symbol for the euro). LuxAir expects the plane to remain useful for five years (5,000,000 miles) and to ha
> Lovell, Inc., purchased a used van for use in its business on January 1, 2015. It paid $13,000 for the van. Lovell expects the van to have a useful life of four years, with an estimated residual value of $1,000 at the end of the four years. Lovell expect
> Lovell, Inc., purchased a used van for use in its business on January 1, 2015. It paid $13,000 for the van. Lovell expects the van to have a useful life of four years, with an estimated residual value of $1,000 at the end of the four years. Lovell expect
> Examine the excerpt of a footnote from Red Rock’s September 30, 2016, annual report to follow. 1. What are Red Rock’s largest two categories of property and equipment as of September 30, 2016? Describe in general ter
> Using the LIFO method, calculate the cost of ending inventory and cost of goods sold for Cowell Corporation. A1 Quantity Unit Cost Total 1 2 Beginning inventory 3 Purchases 4 Goods available for sale 5 Ending inventory 6 Cost of goods sold 100 S 150
> Using the FIFO method, calculate the cost of ending inventory and cost of goods sold for Cowell Corporation. A1 Quantity Unit Cost Total 1 2 Beginning inventory 3 Purchases 4 Goods available for sale 5 Ending inventory 6 Cost of goods sold 100 S 150
> Using the average-cost method, calculate the cost of ending inventory and cost of goods sold for Cowell Corporation. A1 Quantity Unit Cost Total 1 2 Beginning inventory 3 Purchases 4 Goods available for sale 5 Ending inventory 6 Cost of goods sold 1
> Marley Corporation uses the LIFO method to account for inventory. Marley is having an unusually good year, with net income well above expectations. The company’s inventory costs are rising rapidly. What can Marley do immediately before the end of the yea
> McDonough Copy Center is a corporation subject to a 30% income tax. Compute McDonough Copy Center’s income tax expense under the average, FIFO, and LIFO inventory costing methods. Which method would you select to a. maximize income before tax and b. mi
> McDonough Copy Center sells laser printers and supplies. Assume McDonough Copy Center started the year with 100 containers of ink (average cost of $8.00 each, FIFO cost of $8.60 each, LIFO cost of $7.90 each). During the year, McDonough Copy Center purch
> Trinkets Unlimited made total purchases of $250,000 in the most current year. It paid freight in of $3,000 on its purchases. Freight out (the cost to deliver the merchandise to its customers) totaled $7,000. Of the total purchases, Trinkets Unlimited ret
> Rootstown Company sold 10,000 jars of its organic honey in the most current year for $8 per jar. The company had paid $3.50 per jar of honey. (Assume that sales returns are nonexistent.) Calculate the following: 1. Sales revenue 2. Cost of goods sold
> Here is the original schedule of cost of goods sold for Truman Company for the years of 2014 through 2017: During the preparation of its 2017 financial statements, Truman Company discovered that its 2015 ending inventory was understated
> Richardson Supply’s $3.9 million cost of inventory at the end of last year was understated by $1.2 million. 1. Was last year’s reported gross profit of $2.9 million overstated, understated, or correct? What was the correct amount of gross profit last ye
> Metro Technology began the year with inventory of $299,000 and purchased $1,820,000 of goods during the year. Sales for the year are $3,887,500, and Metro Technology’s gross profit percentage is 60% of sales. Compute Metro Technology’s estimated cost of e
> Spritzer Company made sales of $24,000 million during 2016. Cost of goods sold for the year totaled $11,040 million. At the end of 2015, Spritzer’s inventory stood at $1,000 million, and Spritzer ended 2016 with inventory of $1,400 million. Compute Sprit
> It is December 31, the end of the year, and the controller of Saxton Corporation is applying the lower-of-cost-or-market (LCM) rule to inventories. Before any year-end adjustments, Saxton reports the following data: Saxton determines that the current r
> This exercise tests your understanding of the four inventory methods. List the name of the inventory method that best fits the description. Assume that the cost of inventory is rising. 1. Results in an old measure of the cost of endi
> Cozelle, Inc., purchased inventory costing $125,000 and sold 80% of the goods for $200,000. All purchases and sales were on account. Cozelle later collected 25% of the accounts receivable. Assume that sales returns are nonexistent. 1. Journalize these t
> As a recent college graduate, you land your first job in the customer collections department of Silktown Publishing. Alicia Donovan, the manager, asked you to propose a system to ensure that cash received from customers by mail is handled properly. Draft
> Perform the following accounting for the receivables of Bronson and Moore, a law firm, at December 31, 2016. Requirements 1. Set up T-accounts for Cash, Accounts Receivable, and Service Revenue. Start with the beginning balances as follows: Cash $27,00
> On April 3, Parker Company sold $5,000 of merchandise to Wheeler Corporation, terms 2∕10, n∕30, FOB shipping point. Parker Company’s cost of sales for this merchandise was $4,000. The merchandise left Parker Company’s facility on April 4 and arrived at W
> In August, Landeau Designs sold $500,000 of merchandise; all sales were in cash. The cost of sales for August was $320,000. Based on past experience, Landeau uses an estimated refund rate of 4% of sales. Record the journal entries for the monthly sales,
> Costello Company purchases inventory from Terry Pool Supplies on June 1. The sales terms on the invoice from Terry Pool Supplies are 4∕20, net 30. What does this mean? What is Costello’s potential savings, if any? How much time does the company have to t
> On December 23, 2016, Robertson Sports Manufacturing sells a truckload of sporting goods to the Sports R Us store in Columbus, Ohio. The terms of the sale are FOB destination. The truck runs into bad weather on the way to Columbus and doesn’t arrive unti
> Barfield Investments purchased Melnick Corp. shares as a trading security on December 16 for $109,000. 1. Suppose the Melnick Corp. shares decreased in value to $92,000 at December 31. Make the Barfield journal entry to adjust the Investment in Trading S
> Slocomb Corp. holds a portfolio of trading securities. Suppose that on January 15, Slocomb paid $80,000 for an investment in Turok Co. shares to add to its portfolio. At October 31, the market value of Turok Co. shares is $97,000. For this situation, sho
> Answer these questions about receivables and uncollectibles. For the true-false questions, explain any answers that turn out to be false. 1. True or false? Credit sales increase receivables. Collections and write-offs decrease receivables. 2. True or f
> Highland Products reported the following amounts in its 2017 financial statements. The 2016 amounts are given for comparison. Requirements 1. Compute Highland’s quick (acid-test) ratio at the end of 2017. Round to two
> Collins Woodworking accepts credit cards at its store. Collins’ credit card processor charges a fee of 3% of the total amount of any credit sale. Assume that Russell Knight purchases $8,000 of custom furniture and pays with a VISA card. Make the entry th
> On August 31, 2016, Diane Fields borrowed $4,000 from Ferris State Bank. Fields signed a note payable, promising to pay the bank principal plus interest on August 31, 2017. The interest rate on the note is 9%. The accounting year of Ferris State Bank end
> 1. Compute the amount of interest during 2016, 2017, and 2018 for the following note receivable: On May 31, 2016, Charter Bank lent $220,000 to Laurie Walker on a two-year, 10% note. 2. Which party has a (an) a. note receivable? b. note payable? c.
> At the end of the current year (before adjusting entries), Holliday Corporation had a balance of $75,000 in Accounts Receivable and a credit balance of $4,000 in Allowance for Uncollectible Accounts. Service revenue (all on credit) for the year totaled $
> During its first year of operations, Old Tyme Furniture Restoration, Inc., had sales of $461,000, all on account. Industry experience suggests that Old Tyme’s uncollectibles will amount to 4% of credit sales. At December 31, 2016, accounts receivable tota
> Answer these questions about investments. 1. What is the amount to report on the balance sheet for a trading security? 2. Why is a trading security always a current asset? Explain.
> The Cash account of Rampart Corp. reported a balance of $3,530 at August 31, 2016. Included were outstanding checks totaling $1,700 and an August 31 deposit of $400 that did not appear on the bank statement. The bank statement, which came from Park State
> Cardinal Company requires that all documents supporting a check be canceled by punching a hole through the packet. Why is this practice required? What might happen if it were not?
> Cash may be a small item on the financial statements. Nevertheless, internal control over cash is very important. Why is this true?
> Identify the other control procedures usually found in a company’s system of internal control besides separation of duties, and tell why each is important.
> Explain why separation of duties is often described as the cornerstone of internal control for safeguarding assets. Describe what can happen if the same person has custody of an asset and also accounts for the asset.
> List the components of internal control. Briefly describe each component.
> How do computer viruses, Trojan horses, and phishing expeditions work? How can these e-commerce pitfalls hurt you? Be specific.
> Dorthea Alston, an accountant for Fun Tymes Limited, discovers that her supervisor, Eli Golden, made several errors last year. Overall, the errors overstated the company’s net income by 20%. It is not clear whether the errors were deliberate or accidenta
> Describe the types of assets that are typically included under the heading “cash and cash equivalents” on the balance sheet. What is a “cash equivalent”?
> Kent Market (KM) is a major food cooperative. Suppose KM begins 2017 with cash of $5 million. KM estimates cash receipts during 2017 will total $103 million. Planned payments will total $93 million. To meet daily cash needs next year, KM must maintain a
> Answer the following questions about internal control over cash payments: 1. Payment by check carries three controls over cash. What are they? 2. Suppose a purchasing agent receives the goods that he purchases and also approves payment for the goods. H
> Victor Albert sells memberships to the Orlando Symphony Association in Orlando. The symphony’s procedure requires Albert to write a patron receipt for all memberships sold. The receipt forms are pre-numbered. Albert is having personal financial problems,
> Claire Hunter manages Sunshine Manufacturing. Hunter fears that a trusted employee has been stealing from the company. This employee receives cash from clients and also prepares the monthly bank reconciliation. To check up on the employee, Hunter prepare
> After preparing Rampart Corp.’s bank reconciliation in Short Exercise 4-9, make the company’s journal entries for transactions that arise from the bank reconciliation. Date each transaction August 31, 2016, and include an explanation with each entry.
> Define “fraud.” List and briefly discuss the three major components of the fraud triangle.
> During 2016, Quanta Airlines paid salary expense of $41.2 million. At December 31, 2016, Quanta accrued salary expense of $2.4 million. Quanta then paid $2.6 million to its employees on January 3, 2017, the company’s next payday after the end of the 2016
> Suppose that on January 1 Coddington Travel Company paid cash of $30,000 for equipment that is expected to remain useful for five years. At the end of five years, the equipment’s value is expected to be zero. 1. Make journal entries to record a. purcha
> Answer the following questions about prepaid expenses: a. On July 1, Davis Tree Service prepaid $12,000 for six months’ rent. Give the adjusting entry to record rent expense at July 31. Include the date of the entry and an explanation. Then post all amo
> Identify the accounting concept or principle that gives the most direction on how to account for each of the following situations: a. Salary expense of $48,000 is accrued at the end of the period to measure income properly. b. March has been a particul
> Write a short paragraph in your own words to explain the concept of depreciation as used in accounting.
> A large auto manufacturer sells large fleets of vehicles to auto rental companies, such as Budget and Hertz. Suppose Budget is negotiating with the auto manufacturer to purchase 827 vehicles. Write a short paragraph to explain to the auto manufacturer wh
> As the controller of Newton Consulting, you have hired a new employee, whom you must train. She objects to making an adjusting entry for accrued salaries at the end of the period. She reasons, “We will pay the salaries soon. Why not wait until payment to
> Riverside Corporation began 2016 owing notes payable of $3.5 million. During 2016, Riverside borrowed $1.7 million on notes payable and paid off $1.6 million of notes payable from prior years. Interest expense for the year was $0.4 million, including $0.
> Refer to the Tree City Sporting Goods Company data in Short Exercise 3-17. At July 31, 2016, Tree City Sporting Goods Company’s current ratio was 1.90 (rounded) and its debt ratio was 0.45 (rounded). Compute Tree City’
> Tree City Sporting Goods reported the following data at July 31, 2016, with amounts adapted in thousands: 1. Compute Tree City’s net working capital. 2. Compute Tree City’s current ratio. Round to two decimal plac
> Use the Tree City Sporting Goods Company data in Short Exercise 3-15 to make the company’s closing entries at July 31, 2016. Then set up a T-account for Retained Earnings and post to that account. Compare Retained Earningsâ€&
> Suppose Tree City Sporting Goods Company reported the following data at July 31, 2016, with amounts in thousands: Use these data to prepare Tree City Sporting Goods Company’s single-step income statement for the year ended July 31, 20
> Gerbig, Inc., collects cash from customers in advance and from other customers after the sale. Journalize the following transactions for Gerbig: a. Accrued revenue. Some customers pay Gerbig after Gerbig has performed service for the customer. During 20
> Due to the terms of its lease, Peachtree Services, Inc., pays the rent for its new office space in one annual payment of $24,000 on August 1, 2016. The lease covers the period of August 1, 2016, through July 31, 2017. Peachtree Services has a year-end of
> Write a paragraph to explain why unearned revenues are liabilities instead of revenues. In your explanation, use the following actual example: The New York Times, a national newspaper, collects cash from subscribers in advance and later provides news con
