Lawrence’s Company operates a real estate abstract, title, and insurance company. Below are selected transactions and events that occurred during the years 20X1 to 20X4. Using those transactions and events, follow the instructions given. INSTRUCTIONS 1. Give the adjusting entries on December 31, 20X2, to record depreciation expense for the year on all assets. 2. a. Compute the amount of MACRS cost recovery for tax purposes on the furniture and fixtures in (1) 20X2 and (2) 20X3. b. What is the MACRS recovery period for the building? 3. Should Lawrence’s management be concerned with the possibility of asset impairment at the end of 20X4? Explain. 4. Do you agree with the company’s financial manager that depreciation should be reduced in 20X4 because of the decline in business? Explain your answer. TRANSACTIONS AND EVENTS 20X1 AND 20X2 The company purchased a building site for $225,000 on August 2, 20X1. Preparation for construction began in October. Costs that were incurred other than land in 20X1 and 20X2 were: a. grading and preparing the site, $10,000. b. in late June 20X2, paving the sidewalks and parking lot, $18,750 (estimated life 15 years, no salvage value; straight-line depreciation to be used). c. fencing back of the property, $4,000, erected in same week building was completed (estimated life, 10 years; no salvage value; straight-line depreciation to be used). d. building construction contract costs $180,000, completed June 25, 20X2 (estimated life, 35 years; salvage value, $5,000; straight-line depreciation to be used). e. telephone system installed in the last week of June 20X2, $10,000 (estimated life, five years; estimated salvage value, $1,000; sum-of-the-years’-digits depreciation method to be used). f. furniture and fixtures purchased in late June 20X2, $22,500 (estimated life, 10 years; estimated salvage value, $1,500; double-declining-balance method to be used). The company opened for business in the new building on July 5, 20X2. During the remainder of 20X2, the business grew at about the pace anticipated by the company’s management when the project was planned. 20X3 AND 20X4 1. The business continued to grow at the anticipated pace in 20X3. 2. In June 20X4, a rumor was circulated that a hazardous waste deposit existed on the company’s property, but no evidence was presented to support the allegation. In November 20X4, an investigative team from local, state, and federal health services arrived on the scene to conduct a detailed investigation of the property. In the third week of December, they reported having found what had once been a dump site. The investigators took many samples and sent these to laboratories, then left, stating they would return in the second week of January. They hope to have tentative laboratory reports at the time of their return. The company’s attorneys are concerned about the investigation because the company’s insurance does not cover losses from this problem and the state law places responsibility on the current owner to clean up the property. Because of the rumors, customers were reluctant to come to the building and business declined dramatically in November and December 20X4. 3. In late December 20X4, the company’s executive manager suggested that because of the decline in business the company should reduce its current depreciation charge, resulting in lower depreciation in the next few years, with greater depreciation in subsequent years. The manager thinks his plan is akin to units-of-production depreciation and he expects future business to be greater, resulting in higher depreciation at that time.
> Explain the difference between the direct method and the indirect method of preparing the statement of cash flows.
> A corporation’s income statement shows bond interest expense of $16,500. Amortization of the discount on the bonds during the year was $1,500. What is the amount of cash outflow for bond interest expense?
> What is the purpose of the statement of cash flows?
> How does the acid-test ratio differ from the current ratio?
> What is the procedure for measuring earnings per share of common stock?
> The Stockholders’ Equity section of the FT Company balance sheet at the close of the current year follows: Stockholders’ Equity Preferred Stock (6%, $100 par value, 100,000 shares authorized) At Par Value (60,000 shares issued) $ 6,000,000 Paid-in Capita
> What does the rate of net income on stockholders’ equity tell stockholders?
> Which is more important: a larger change in percentage or a large change in dollar amount?
> In a vertical analysis of the balance sheet, what is the base for comparing each item on the statement?
> What is meant by vertical analysis of the income statement?
> If a company’s net sales and its cost of goods sold both increase by 12 percent from 2021 to 2022, would gross profit on sales also increase by 12 percent?
> Why would a short-term creditor be interested in the analysis of a company’s income statement?
> As a rule of thumb, what is the minimum desired current ratio?
> What does the accounts receivable turnover measure?
> How is inventory turnover computed?
> What are common-size statements?
> Just after its formation on September 1, 20X1, the ledger accounts of Ducks, Inc., contained the following balances: Accrued Expenses Payable $ 4,000 Accounts Payable 7,000 Accounts Receivable 53,000 Allowance for Doubtful Accounts 4,000 Building 300,000
> How are the legal costs and other costs related to issuing bonds accounted for?
> Why is the year-end adjusting entry for amortization of a bond premium or discount reversed at the start of the new year?
> Why is a bond premium or discount amortized as part of the adjustment process at the end of the year?
> In a bond indenture dated January 1, 2022, Pink Company authorized the issuance of $500,000 face value, 10 percent, 20-year bonds payable. No bonds were issued until July 1, 2023, when bonds with a face value of $200,000 were issued. At that time, the ma
> Why might a company use a special bank account for paying bond interest?
> Are authorized, unissued bonds shown on the balance sheet? If so, where?
> How is the Bonds Payable account classified on the balance sheet?
> What is a bond indenture?
> Explain the accounting treatment necessary when bonds are retired before maturity.
> What is the relationship between a bond sinking fund and an appropriation of retained earnings for bond retirement? Explain.
> For several years, Herschel Anderson had operated Management Consulting Company as its sole proprietor. On January 1, 20X1, he formed a partnership with Richard Harris to operate the company under the name Harris-Anderson Professional Management Consulta
> What is a bond sinking fund?
> What is a collateral trust bond?
> Several years ago a corporation made an appropriation of retained earnings because of a building project. The building project was completed in the current year. What accounting entry will probably be made with respect to the appropriation?
> What effect does an appropriation have on total retained earnings?
> What effect does a stock split have on retained earnings? Explain.
> How is the Common Stock Dividend Distributable account classified in the financial statements?
> When a stock dividend is declared, what journal entry is made? How is the amount of the dividend determined or measured?
> Compare the effects on stockholders’ equity of a cash dividend and a stock dividend.
> Explain the three dates related to declaration and payment of a cash dividend. On which of these dates must journal entries be made?
> What causes “deferred income taxes” to arise? How are balances in “deferred income taxes” accounts disposed of?
> Joseph Colgan has operated a successful motorcycle repair business for the past several years. Colgan thinks his business is almost too successful because he has very little time for himself. Colgan and Brianna Jenkins, who is also a motorcycle enthusias
> What is the purpose of the statement of stockholders’ equity?
> What information is shown on the statement of retained earnings?
> At what amount is treasury stock shown on the balance sheet? How is it classified on the balance sheet?
> As an inducement for Paul Company to locate in Townville, the local chamber of commerce gave the corporation a tract of land with an appraised value of $250,000. How should the gift be accounted for by Paul?
> How is income tax expense classified in the corporation’s income statement?
> Describe the flow of authority and responsibility in a corporate entity.
> Who makes the day-to-day decisions necessary for a corporation to operate?
> What does the term “restricted agency” mean?
> What is meant by the “par value of stock”?
> What is the role of the transfer agent?
> What is the purpose of the minute book?
> How are the members of a corporation’s board of directors selected?
> How does par value differ from stated value?
> What are some benefits of a subchapter S corporation?
> If there is only one class of stock, what is it called?
> What are the corporation’s bylaws?
> Where is the usual place for organizers of a new corporation to acquire a corporate charter?
> Selling stock on a subscription basis involves considerable recordkeeping. Why does a corporation sell its shares in this way?
> What is the difference between the Common Stock Subscribed account and the Subscriptions Receivable—Common Stock account?
> What is convertible preferred stock?
> In a review of the annual reports of Pierce Wholesale Company and International Distributors, you note that Pierce Wholesale uses straight-line depreciation and International Distributors uses the declining-balance method. 1. Are these companies violatin
> When common stock without a par value or a stated value is issued, what amount is credited to the capital stock account when the stock is issued?
> What is cumulative preferred stock?
> What is participating preferred stock?
> What is the control account for the individual shareholder accounts in the common stockholders’ ledger?
> How are organization costs accounted for?
> What role does the registrar of a corporation serve?
> What are organization costs?
> What is the difference between a dissolution and liquidation?
> What is a stock subscription?
> Why would a new corporation issue no-par stock with a stated value, rather than par-value Stock?
> What are the major disadvantages of the partnership form of business entity?
> One of Wells Company’s retail outlets was destroyed by fire on March 18. All merchandise was burned. The company has fire insurance on its merchandise inventory. It will therefore file a claim for recovery of the cost of the lost invent
> List the major advantages of the partnership form of business over a corporation.
> What information appears on a statement of partners’ equities?
> The two partners in a business often pay personal bills by writing checks on the business bank account. Is this a good business practice? Explain. How should such payments be recorded?
> Explain how the partnership accounts for the sale by a partner of a portion of his partnership interest to another individual.
> What are typical considerations that affect the way income is allocated among partners?
> List the steps required to dissolve a partnership.
> Why should the assets and liabilities of an existing partnership be revalued when a new partner is to be admitted by the investment of cash in the organization?
> Explain what the term “mutual agency” means in regard to a partnership.
> Explain how the net income of a partnership is allocated if it is less than the salary and interest allowances.
> Sadler Computer Supply Company has just been destroyed by fire. Fortunately, however, the computerized accounting records had been “backed up” and were in a remote computer location so that the records were not destroyed. The company does not use the ret
> Are partners’ salaries considered to be expenses of the partnership? Explain.
> What is the advantage of a limited partnership?
> How does the balance sheet of a partnership differ from that of a sole proprietorship?
> Is Allowance for Doubtful Accounts brought forward from the general ledger of a sole proprietorship when the firm’s assets and liabilities are being transferred to the partnership? Why?
> Why are assets of an existing sole proprietorship revalued when they are transferred to a partnership?
> Does a partnership pay federal income tax? Explain.
> Does a partnership continue to exist after the death of a partner? Explain.
> Explain the use of a drawing account in a partnership.
> Which of these, if any, is not “real property”? a. land b. a building c. a motor home being used as an office d. pavement for a parking lot
> Name three or more events, developments, or situations that indicate impairment of property, plant, and equipment may exist.
> 1. The vice president of the manufacturing company for which you are the accountant has suggested to the president that all prices should be established on the basis of direct costing. Respond to this suggestion. 2. Assume that the company where you are
> 1. In discussing a firm’s latest financial statements, a manager says that it is the “results on the bottom line” that really count. What does the manager mean? 2. If a firm’s expenses equal or exceed its revenue, what actions might management take? 3. H
> What information related to the company’s property, plant, and equipment must be presented in the financial statements and in the notes to the financial statements?
> Under what circumstances is the units-of-production method of depreciation especially desirable?
> What is the basic test for determining whether impairment does, in fact, exist?
> Which method will give you a higher amount of depreciation expense in the later years of an asset’s life, straight-line or declining-balance? Explain.
> Is MACRS used for federal income tax rules acceptable under GAAP?
> How is the amount of impairment to be recorded determined?
