General Mills is a multibillion-dollar company that makes and sells products used in the kitchens of most American homes. The Company’s annual report included the following note: We have a revolving credit agreement expiring in two years that provides for a credit line (which permits us to borrow money when needed). This agreement provides us with the opportunity to refinance short term borrowings on a long-term basis. Should General Mills classify the short-term borrowings as current or noncurrent debt based on this ability to borrow money to refinance the debt if needed? If you were a member of the management team, explain what you would want to do and why. If you were a financial analyst, would your answer be different?
> Buzz Coffee Shops is famous for its large servings of hot coffee. After a famous case involving McDonald’s, the lawyer for Buzz warned management (during 2011) that it could be sued if someone were to spill hot coffee and be burned: “With the temperature
> Ospry, Inc., has a quick ratio of 0.50 and working capital in the amount of $1,240,000. For each of the following transactions, determine whether the quick ratio and working capital will increase, decrease, or remain the same. a. Paid accounts payable i
> Wygant Corporation borrowed $290,000 on October 1, 2011. The note carried a 10 percent interest rate with the principal and interest payable on May 1, 2012. Prepare the journal entry to record the note on October 1. Prepare the adjusting entry to record
> You want a retirement fund of $125,000 when you retire in six years. You are able to earn 8 percent on your investments. How much should you deposit each year to build the retirement fund that you want?
> What four criteria must normally be met for revenue to be recognized under accrual basis accounting?
> On January 1, 2011, you deposited $6,000 in a savings account. The account will earn 10 percent annual compound interest, which will be added to the fund balance at the end of each year. Required (round to the nearest dollar): 1. What will be the balan
> You have the chance to purchase the royalty interest in a gas well in the Barnett Shale. Your best estimate is that the net royalty income will average $25,000 per year for seven years. There will be no residual value at that time. Considering the uncert
> Smith Company has purchased a new office building. The company has agreed to pay the developer $55,000 annually for 9 years. Using present value techniques, determine the value that should be recorded for the building when it is purchased. Assume a 6 per
> An investment will pay $15,000 at the end of each year for eight years and a one-time payment of $120,000 at the end of the eighth year. Determine the present value of this investment using a 7 percent interest rate.
> Refer to P2-3. Cougar Plastics Company has been operating for three years. At December 31, 2011, the accounting records reflected the following: During the year 2012, the company had the following summarized activities: a. Purchased short-term investm
> An investment will pay $11,000 at the end of the first year, $30,000 at the end of the second year, and $50,000 at the end of the third year. Determine the present value of this investment using a 10 percent interest rate.
> Judge Drago has decided to set up an educational fund for his favorite granddaughter, Emma, who will start college in one year. The judge plans to deposit an amount in a savings account that pays 9 percent interest. He wants to deposit an amount that is
> You are a financial adviser working with a client who wants to retire in eight years. The client has a savings account with a local bank that pays 9 percent and she wants to deposit an amount that will provide her with $900,000 when she retires. Currentl
> You have just won the state lottery and have two choices for collecting your winnings. You can collect $50,000 today or receive $10,100 per year for the next seven years. A financial analyst has told you that you can earn 10 percent on your investments.
> Super Savers Department Store reported a quick ratio of 0.6. A review of its balance sheet revealed the following information: Quick assets......................................................$120,000 Current assets.....................................
> Explain the difference between a. Revenues and gains. b. Expenses and losses.
> On each December 31, you plan to deposit $2,000 in a savings account. The account will earn 9 percent annual interest, which will be added to the fund balance at year-end. The first deposit will be made December 31, 2011 (end of period). Required (show
> On January 1, 2011, Alan King decided to deposit $58,800 in a savings account that will provide funds four years later to send his son to college. The savings account will earn 8 percent, which will be added to the fund each year-end. Required (show com
> On January 1, 2011, Shannon Company completed the following transactions (assume a 10 percent annual interest rate): a. Bought a delivery truck and agreed to pay $50,000 at the end of three years. b. Rented an office building and was given the option o
> The annual report for Starbucks contains the following information (in millions): Income Taxes The provision for income taxes consisted of the following (in millions): Required: 1. Determine whether tax expense is higher or lower than taxes payable f
> The balance sheet for Nair Corporation provided the following summarized pretax data: The income statement reported tax expense for 2012 in the amount of $580,000. Required: 1. What was the amount of income taxes payable for 2012? 2. Why would manag
> Cougar Plastics Company has been operating for three years. At December 31, 2011, the accounting records reflected the following: During the year 2012, the company had the following summarized activities: a. Purchased short-term investments for $9,000
> The following information pertains to the Lewis Corporation. Required: 1. For each year, compute income tax expense (assume that no taxes have been paid). 2. Explain why tax expense is not simply the amount of cash paid during the year. Year 2011
> The annual report for American Airlines contained the following information: In addition to pension benefits, other postretirement benefits, including certain health care and life insurance benefits (which provide secondary coverage to Medicare), are pr
> As the new vice president for consumer products at Heffner Manufacturing, you are attending a meeting to discuss a serious problem associated with delivering merchandise to customers. Bob Smith, director of logistics, summarized the problem: “It’s easy t
> McDonald’s is one of the world’s most popular fast-food restaurants, offering good food and convenient locations. Effective management of its properties is a key to its success. As the following note in its current annual report indicates, McDonald’s bot
> Write the income statement equation and define each element.
> Vernon Company sells a wide range of goods through two retail stores operated in adjoining cities. Most purchases of goods for resale are on invoices. Occasionally, a short-term note payable is used to obtain cash for current use. The following transacti
> PepsiCo, Inc., manufactures a number of products that are part of our daily lives. Its businesses include Pepsi, Frito-Lay, Tropicana, Quaker, and Gatorade. The company’s annual revenues exceed $22 billion. A recent PepsiCo annual report contained the fo
> Using the data from the previous exercise, complete the following requirements. Required: 1. Determine the financial statement effects for each of the following: (a) issuance of the note on November 1, (b) the impact of the adjusting entry at the end
> Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Neiman Marcus is one of America’s most prestigious retailers. Each Christmas season, Neiman Marcus builds up its inventory to meet th
> Oaks Company has completed the payroll for January 2012, reflecting the following data: Salaries and wages earned..........................$86,000 Employee income taxes withheld...................10,000 FICA payroll taxes*...............................
> Paul Company completed the salary and wage payroll for March 2011. The payroll provided the following details: Salaries and wages earned..................................$200,000 Employee income taxes withheld...........................40,000 Insurance
> East Hill Home Healthcare Services was organized on January 1, 2011, by four friends. Each organizer invested $10,000 in the company and, in turn, was issued 8,000 shares of stock. To date, they are the only stockholders. At the end of 2012, the accounti
> Diane Corporation is preparing its 2012 balance sheet. The company records show the following selected amounts at the end of the accounting period, December 31, 2012: Total assets..........................................................................
> On January 1, 2011, you plan to take a trip around the world upon graduation four years from now. Your grandmother wants to deposit sufficient funds for this trip in a savings account for you. On the basis of a budget, you estimate that the trip currentl
> Many advertisements contain offers that seem too good to be true. A few years ago, an actual newspaper ad offered “a $150,000 house with a zero interest rate mortgage” for sale. If the purchaser made monthly payments of $3,125 for four years ($150,000 ÷
> Identify whether the following transactions affect cash flow from operating, investing, or financing activities, and indicate the effect of each on cash ( + for increase and − for decrease). If there is no cash flow effect,
> In some cases, a manager can engage in transactions that improve the appearance of financial reports without affecting the underlying economic reality. In this chapter, we discussed the importance of liquidity as measured by the quick ratio and working c
> The New York State Lottery Commission ran the following advertisement in a number of New York newspapers: The Lotto jackpot for Wednesday, August 25, 1999, will be $3 million including interest earned over a 20-year payment period. Constant payments will
> The president of a regional wholesale distribution company planned to borrow a significant amount of money from a local bank at the beginning of the next fiscal year. He knew that the bank placed a heavy emphasis on the liquidity of potential borrowers.
> Refer to the financial statements of American Eagle given in Appendix B at the end of this book. Required: 1. What is the amount of accrued compensation and payroll taxes at the end of the most recent reporting year? 2. By what amount did accounts payab
> Refer to the financial statements of American Eagle (Appendix B) and Urban Outfitters (Appendix C) and the Industry Ratio Report (Appendix D) at the end of this book. Required: 1. Compute the quick ratio for each company for the current year. 2. Compare
> Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. Required: 1. What is the amount of accrued compensation at the end of the most recent reporting year? 2. By what amount did accounts payable change over t
> For each of the following transactions, determine whether cash flows from operating activities will increase, decrease, or remain the same: a. Purchased merchandise for cash. b. Paid salaries and wages for the last month of the previous accounting peri
> Exxon Mobil Corporation explores, produces, refines, markets, and supplies crude oil, natural gas, and petroleum products in the United States and around the world. The following are accounts from a recent balance sheet of Exxon Mobil Corporation: Requ
> After completing a long and successful career as senior vice president for a large bank, you are preparing for retirement. Visiting the human resources office, you find that you have several retirement options: (1) you can receive an immediate cash paym
> On January 1, 2011, Ellsworth Company completed the following transactions (use an 8 percent annual interest rate for all transactions): a. Borrowed $2,000,000 to be repaid in five years. Agreed to pay $150,000 interest each year for the five years. b.
> State the equation for the total asset turnover ratio and explain how it is interpreted.
> Ford Motor Company is one of the world’s largest companies with annual sales of cars and trucks in excess of $170 billion. A recent annual report for Ford contained the following note: Warranties Estimated warranty costs are accrued for at the time the
> Using data from problem AP9-1, complete the following requirements. Data from AP9-1: Sturgis Company completed the following transactions during 2012. The annual accounting period ends December 31, 2012. Jan. 15 Recorded tax expense for the year i
> Sturgis Company completed the following transactions during 2012. The annual accounting period ends December 31, 2012. Jan. 15 Recorded tax expense for the year in the amount of $125,000. Current taxes payable were $93,000.
> On January 1, 2011, Austin Auto Company decided to accumulate a fund to build an addition to its plant. The company will deposit $320,000 in the fund at each year-end, starting on December 31, 2011. The fund will earn 9 percent interest, which will be ad
> What is asset impairment? How is it accounted for?
> Define goodwill. When is it appropriate to record goodwill as an intangible asset?
> Define intangible asset. What period should be used to amortize an intangible asset with a definite life?
> Which of the following is not a financing activity on the statement of cash flows? a. When the company lends money. b. When the company borrows money. c. When the company pays dividends. d. When the company issues stock to shareholders.
> When equipment is sold for more than net book value, how is the transaction recorded? For less than net book value? What is net book value?
> Explain why revenues are recorded as credits and expenses as debits.
> Refer to E3-10 . Stacey’s Piano Rebuilding Company has been operating for one year (2010). At the start of 2011, its income statement accounts had zero balances and its balance sheet account balances were as follows: Required: Use t
> Over what period should an addition to an existing long-lived asset be depreciated? Explain.
> What type of depreciation expense pattern is used under each of the following methods and when is its use appropriate? a. The straight-line method. b. The units-of-production method. c. The double-declining-balance method.
> The estimated useful life and residual value of a long-lived asset relate to the current owner or user rather than all potential users. Explain this statement.
> In computing depreciation, three values must be known or estimated; identify and explain the nature of each.
> Distinguish among depreciation, depletion, and amortization.
> Distinguish between a. Capital expenditures and revenue expenditures. How is each accounted for? b. Ordinary repairs and improvements. How is each accounted for?
> Describe the relationship between the matching principle and accounting for long-lived assets.
> Under the cost principle, what amounts should be included in the acquisition cost of a long-lived asset?
> What are the classifications of long-lived assets? Explain each.
> At the end of a recent year, The Gap, Inc., reported total assets of $7,564 million, current assets of $4,005 million, total liabilities of $3,177 million, current liabilities of $2,158 million, and stockholders’ equity of $4,387 million. What is its cur
> Explain why stockholders’ equity is increased by revenues and decreased by expenses.
> How is the fixed asset turnover ratio computed? Explain its meaning.
> Define long-lived assets. Why are they considered to be a “bundle of future services”?
> Why is depreciation expense added to net income (indirect method) on the statement of cash flows?
> On January 2, 2012, Cruz Company bought a machine for use in operations. The machine has an estimated useful life of eight years and an estimated residual value of $2,600. The company provided the following expenditures: a. Invoice price of the machine
> Rungano Corporation is a global publisher of magazines, books, and music and video collections and is a leading direct mail marketer. Many direct mail marketers use high-speed Didde press equipment to print their advertisements. These presses can cost mo
> Starn Tool Company has five different intangible assets to be accounted for and reported on the financial statements. The management is concerned about the amortization of the cost of each of these intangibles. Facts about each intangible follow: a. Pat
> The notes to a recent annual report from Weebok Corporation included the following: Business Acquisitions During the current year, the Company acquired the assets of Sport Shoes, Inc. . . . Assume that Weebok acquired Sport Shoe
> During the 2011 annual accounting period, BSP Company completed the following transactions: a. On January 1, 2011, purchased a patent for $28,000 cash (estimated useful life, seven years). b. On January 1, 2011, purchased the assets (not detailed) of a
> Singapore Airlines reported the following information in the notes to a recent annual report (in Singapore dollars): Singapore Airlines also reported the following cash flow details: Required: 1. Reconstruct the information in Note 19 using T-account
> During 2012, Jensen Company disposed of three different assets. On January 1, 2012, prior to their disposal, the accounts reflected the following: The machines were disposed of in the following ways: a. Machine A: Sold on January 1, 2012, for $7,200 c
> Explain the matching principle.
> Which of the following statements are true regarding the balance sheet? 1. One cannot determine the true fair market value of a company by reviewing its balance sheet. 2. Certain internally generated assets, such as a trademark, are not reported on a c
> You are a financial analyst for Ford Motor Company and have been asked to determine the impact of alternative depreciation methods. For your analysis, you have been asked to compare methods based on a machine that cost $106,000. The estimated useful life
> Best Buy Co., Inc., headquartered in Richfield, Minnesota, is one of the leading consumer electronics retailers, operating more than 1,000 stores in the United States, Europe, Canada, China, and Mexico. The following was reported in a recent annual repor
> At the beginning of the year, Plummer’s Sports Center bought three used fitness machines from Advantage, Inc. The machines immediately were overhauled, installed, and started operating. The machines were different; therefore, each had t
> A recent annual report for FedEx included the following note: Assume that FedEx made extensive repairs on an existing building and added a new wing. The building is a garage and repair facility for delivery trucks that serve the Denver area. The existi
> Thornton Industries purchased a machine for $45,000 and is depreciating it with the straight-line method over a life of 10 years, using a residual value of $3,000. At the beginning of the sixth year, a major overhaul was made costing $5,000, and the tota
> When recording depreciation, which of the following statements is true? a. Total assets increase and stockholders’ equity increases. b. Total assets decrease and total liabilities increase. c. Total assets decrease and stockholders’ equity increases.
> Company X is going to retire equipment that is fully depreciated with no residual value. The equipment will simply be disposed of, not sold. Which of the following statements is false? a. Total assets will not change as a result of this transaction. b.
> How many of the following statements regarding goodwill are true? ■ Goodwill is not reported unless purchased in an exchange. ■ Goodwill must be reviewed annually for possible impairment. ■ Impairment of goodwill results in a decrease in net income. a.
> A company wishes to report the highest earnings possible for financial reporting purposes. Therefore, when calculating depreciation, a. It will follow the MACRS depreciation tables prescribed by the IRS. b. It will select the shortest lives possible fo
> Define accrual accounting and contrast it with cash basis accounting.
> What assets should be amortized using the straight-line method? a. Intangible assets with definite lives b. Intangible assets with indefinite lives c. Natural resources d. All of the above
> The Cash T-account has a beginning balance of $21,000. During the year, $98,000 was debited and $110,000 was credited to the account. What is the ending balance of Cash? a. $33,000 debit balance b. $9,000 credit balance c. $33,000 credit balance d. $
> Under what method(s) of depreciation is an asset’s net book value the depreciable base (the amount to be depreciated)? a. Straight-line method b. Declining-balance method c. Units-of-production method d. All of the above
> Ryan, Inc., uses straight-line depreciation for all of its depreciable assets. Ryan sold a used piece of machinery on December 31, 2012, that it purchased on January 1, 2011, for $10,000. The asset had a five-year life, zero residual value, and $2,000 ac
> Barber, Inc., followed the practice of depreciating its building on a straight-line basis. A building was purchased in 2011 and had an estimated useful life of 25 years and a residual value of $20,000. The company’s depreciation expense for 2011 was $20,
> Miga Company and Porter Company both bought a new delivery truck on January 1, 2008. Both companies paid exactly the same cost, $30,000, for their respective vehicles. As of December 31, 2011, the net book value of Miga’s truck was less than Porter Compa
> For each of the following long-lived assets, indicate its nature and the related cost allocation concept. Use the following symbols: Nature Cost Allocation Concept DR Depreciation DP L Land Building Equipment Natural resource Depletion E A Amortiza
