The following events and transactions related to David Company occurred after the balance sheet date of December 31, 2017, and before the financial statements were issued in 2018. None of the items is reflected in the financial statements as of December 31, 2017. Required: 1. In order to secure a bank loan of $200,000, David pledged as collateral certain fixed assets with a net book value of $300,000. David applied for the loan on December 18, 2017, and the bank approved the loan on January 8, 2018. 2. On November 21, 2017, David initiated a lawsuit seeking $500,000 in damages from a firm that David claims infringed on its trademark. David’s attorneys have stated that the chances of winning and of getting the $500,000 are excellent. 3. On February 22, 2018, David issued bonds at an interest rate 2 percentage points above the LIBOR (London Interbank Offered Rate). This is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. 4. A warehouse containing a significant portion of David’s inventory was destroyed by fire on January 30, 2018. 5. A supplier to whom David owes $15,000 declared bankruptcy on February 3, 2018. Indicate whether the item would be reported in David Company’s 2017 financial statements or in the notes to the financial statements, and what information would be reported. Assume that each of these events is considered material.
> The following information is taken from the operating section of the statement of cash flows (direct method) of Battery Builders, Inc.: Collections from customers ……………………………………$ 28,000 Payments to suppliers for purchases ………………… ………………… (13,000) Paymen
> Zahava Corporation sells equipment to Ari Company for $700,000. Ari does not need the equipment until December 31, 2021, but agrees to pay $600,000 immediately on December 31, 2019, in order to assist Zahava with its finances. The remaining $100,000 is d
> Zahava Corporation sells equipment to Ari Company for $700,000 on December 31, 2019. The two companies agree that Ari will pay $100,000 upon delivery (December 31, 2019), with the remaining $600,000 due on December 31, 2021. Zahava is confident that Ari
> Ladd Corporation sells construction equipment to a customer for $200,000. The equipment comes with a standard 10-year warranty covering all maintenance and repairs during that time. Initially, Ladd estimates that it will incur $10,000 in costs over the l
> On January 1, 2019, Quenneville Corporation sold equipment to Wirtz, Inc., for $500,000. The equipment had cost $300,000 to manufacture. The contract with Wirtz requires Quenneville to provide complete maintenance and repair services on the equipment for
> Panarin Company entered into two contracts on the same date with Hjalmarsson Corporation. Panarin has provided the following analysis of price and cost for the contracts: Hjalmarsson, the customer, may cancel both contracts if either of them is not ful
> Teuvo Company entered into two contracts on the same date with Rundblad Corporation. Teuvo has provided the following analysis of price and cost for the contracts: You inquired about why Teuvo would have agreed to make a sale at a loss. The company&aci
> MSK Construction Company contracted to construct a factory building for $525,000. Construction started during 2019 and was completed in 2020. Information relating to the contract follows: 1. Record the preceding transactions in MSK’s
> It’s late Tuesday evening, and you’ve just received a phone call from Dennis Whiting, your boss at GE Capital. Dennis wants to know your reaction to the Argenti loan request before tomorrow’s loan com
> Cornwell Construction Company has been operating in Pennsylvania for a number of years. During 2019, the firm contracted with the Borough of Lewisburg to build a domed sports complex. Cornwell estimated that it would take three years to complete the faci
> In 2019, its first year of operations, Regal Department Store sells $250,000 of gift certificates redeemable for store merchandise that expire one year after their issuance. With a high degree of certainty, Regal believes 10% of the gift certificates wil
> Maffett Ticket Brokers is a reseller of tickets to sporting events and concerts. During 2019, Maffett sold gift cards totaling $250,000. Based on past experience, Maffett expects that 1% of the gift card purchases will not be redeemed by the time they ex
> Gallemore Corporation entered into a contract to sell a machine to Christiansen Corporation for $2 million. Christiansen pays for the equipment, but asks Gallemore to delay shipment under a “bill-and-hold” arrangement. Gallemore agrees. Under each of the
> Under a single contract, Sapra Corporation sold two machines to Gao Company in 2019. One of the machines typically sells for $300,000 and the other for $150,000. Because Gao purchased the machines together, Sapra agreed to a price of $425,000 for both ma
> Berger Company had sales in 2019 of $200,000. The goods sold cost Berger $125,000. The goods were sold with the right of return. By the end of 2019, goods having a total selling price of $10,000 had been returned. As of December 31, 2019, Berger expected
> Online Auction Company (OAC) provides a platform for its users to buy and sell goods. Sellers post goods for sale and other users bid on them. They high bidder wins the auction and purchases the goods. After each auction, the seller pays OAC a 10% fee an
> Foremost Company owns a royalty interest in an oil well. The contract stipulates that Foremost will receive royalty payments semiannually on January 31 and July 31. The January 31 payment will be for 30% of the oil sold to jobbers between the previous Ju
> Ball Data Corporation provides stock market data to investors. On January 1, 2019, it sells a customer access to its real-time database for two years at a price of $600,000. The customer has the right to access Ball’s database any time, 24 hours per day,
> On January 1, 2019, Skinner Equipment Company leased equipment used in mineral extraction operations to Erickson Corporation. The monthly base rental fee was $250,000. In addition, at the end of the year, Erickson must pay Skinner a bonus of one month’s
> On July 1, 2019, Grams Construction, Inc. agreed to construct a factory for a customer. The contract called for payments to Grams totaling $2 million. Grams has correctly determined that it is appropriate to recognize revenue over time, and it uses its c
> Crocs designs, develops, and manufactures consumer products from specialty resins. The company’s primary product line is Crocs-branded footwear for men, women, and children. It sells its products through traditional retail channels, inc
> Wellington International Airport Limited is a for-profit company domiciled in New Zealand that manages the Wellington Airport and files its financial statements in compliance with IFRS. For the period ending September 30, 2012, Wellington reported the fo
> Fox Photography Corporation charges $3,000 to photograph a wedding. Customers may print the images elsewhere or have them printed by Fox. Each wedding couple receives a coupon for $250 off the purchase of prints from Fox. History indicates that 60% of th
> Posa Hotels, Inc., has a sixth night free policy. Every sixth night a guest stays at the hotel is free. Because not all guests stay enough nights to earn a free stay, on average the number of free nights redeemed is 70% of the maximum possible number of
> Barrios Communications is a provider of satellite television services. It will install a satellite dish free of charge for any customer that agrees to a one-year service contract at a price of $50 per month. Installation costs Barrios $150. Customers typ
> In 2017, the new CEO of Watsontown Electric Supply became concerned about the company’s apparently deteriorating financial position. Wishing to make certain that the grim monthly reports he was receiving from the company’s bookkeeper were accurate, the C
> KEW Enterprises began operations in January 2015 to manufacture a hand sanitizer that promised to be more effective and gentler on the skin than existing products. Family members, one of whom was delegated to be the office manager and bookkeeper, staffed
> Holman Electronics manufactures audio equipment, selling it through various distributors. Holman’s days sales outstanding (Accounts receivable / Average daily credit sales) figures increased steadily in 2017 and then spiked dramatically in 2018, peaking
> In its 2012 annual report, UPS, a global package delivery company, reported the following performance data: the end of 2011 and the end of 2012 is due to fundamental changes in business operations or the business environment. At the beginning of 2012,
> During the fourth quarter of 2017, ABBA Fabrics, Inc., elected to change its method of valuing inventory to the weighted average cost (“WAC”) method, whereas in all prior years’ inventory was valued u
> Barden, Inc., operates a retail chain that specializes in baby clothes and accessories that are made to its specifications by a number of overseas manufacturers. Barden began operations in 2008 and has always employed the FIFO method to value its invento
> For 2017, Silvertip Construction, Inc., reported income from continuing operations (after tax) of $1,650,000. On November 15, 2017, the company adopted a plan to dispose of a component of the business. This component qualifies for discontinued operations
> JDW Corporation reported the following for 2017: net sales $2,929,500; cost of goods sold $1,786,995; selling and administrative expenses $585,900; an unrealized holding loss on available-for-sale securities $22,000; a positive foreign currency translati
> McDonald’s Corporation franchises and operates more than 36,000 fast-service restaurants around the world. Buffalo Wild Wings franchises and operates more than 1,000 restaurants in North America. Buffalo Wild Wings features chicken wing
> The following condensed statement of income of Helen Corporation, a diversified company, is presented for the two years ended December 31, 2017 and 2016: On January 1, 2017, Helen entered into an agreement to sell for $3,200,000 the assets and produc
> Bob’s Chocolate Chips and More, a bakery specializing in gourmet pizza and chocolate chip cookies, started business October 1, 2017. The following transactions occurred during the month of October. a. Common stock of $90,000 was sold at par to start the
> During August 2017, Packer Manufacturing had the following cash receipts and disbursements: Cash received from customers ………………. $319
> The following is selected information from Bob Touret, Inc.’s financial statements. Solve for the missing amounts for each of the five years. You may have to use some numbers from the year before or the year after to solve for certain c
> On June 30, 2017, a tornado damaged Jensen Corporation’s warehouse and factory, completely destroying the work-in-process inventory. Neither the raw materials nor finished goods inventories were damaged. A physical inventory taken after the tornado revea
> Following is selected information from the balance sheet for Flaps Inc. Solve for the missing amounts for each of the five years. Year 2016 2017 2018 2019 2020 Total liabilities and stockholders' equity Current liabilities $13,765 F K P U A $3,420
> Hestor Company’s records indicate the following information: Merchandise inventory, January 1, 2017 …………………………$ 550,000 Purchases, January 1 through December 31, 2017 …………………………2,250,000 Sales, January 1 through December 31, 2017 …………………………3,000,000 On
> For the year 2017, Dumas Company’s gross profit was $96,000; the cost of goods manufactured was $340,000; the beginning inventories of goods in process and finished goods were $28,000 and $45,000, respectively; and the ending inventories of goods in proc
> The following information is available for Day Company for 2017: Cash disbursements for purchase of merchandise ……………$290,000 Increase in trade accounts payable ………………………………………25,000 Decrease in merchandise inventory ………………………………………10,000 What is the c
> Jessica’s Office Supply, Inc., had 300 calculators on hand at January 1, 2017, costing $16 each. Purchases and sales of calculators during the month of January were as follows: Jessica does not maintain perpetual inventory records. Ac
> Sperry-New Holland manufactures farm machinery. During 2017, it incurred a variety of costs, several of which appear on the following list. Nature of Incurred Cost a. Comprehensive liability insurance premium on corporate headquarters b. Depreciation on
> Cost for inventory purposes should be determined by the inventory cost flow method most clearly reflecting periodic income. 1. Describe the fundamental cost flow assumptions for the average cost, FIFO, and LIFO inventory cost flow methods. 2. Discuss the
> On December 31, 2016, Fern Company adopted the dollar-value LIFO inventory method. All of Fern’s inventories constitute a single pool. The inventory on December 31, 2016, using the dollar-value LIFO inventory method was $600,000. Inventory data for 2017
> Acute Company manufactures a single product. On December 31, 2014, it adopted the dollar- value LIFO inventory method. The inventory on that date using the dollar-value LIFO inventory method was determined to be $300,000. Inventory data for succeeding ye
> Moore Corporation uses the FIFO cost flow method and has numerous units of two products in its ending inventory. Each is accounted for at the lower of cost or net realizable value under Accounting Standards Update (ASU) 2015-11. A profit margin of 30% on
> The following additional information is provided: a. The company paid a salary advance of $5,000 to one of its employees, a total that was debited to the Salaries expense account. This was an advance against the employee’s salary for th
> The following inventory valuation errors have been discovered for Knox Corporation: The 2015 year-end inventory was overstated by $23,000. The 2016 year-end inventory was understated by $61,000. The 2017 year-end inventory was understated by $17,000.
> Nathan’s Grills, Inc., imports and sells premium-quality gas grills. The company had the following layers in its LIFO inventory at January 1, 2017, at which time the replacement cost of the inventory was $675 per unit. The replacement
> KW Steel Corp. uses the LIFO method of inventory valuation. Waretown Steel, KW’s major competitor, instead uses the FIFO method. The following are excerpts from each company’s 2017 financial statements: Required: 1.
> Blago Wholesale Company began operations on January 1, 2017, and uses the average cost method in costing its inventory. Management is contemplating a change to the FIFO method in 2018 and is interested in determining how such a change will affect net inc
> Selected information concerning the operation of Kern Company for the year ended December 31, 2017, is available as follows: Units produced …………………………………………………………………10,000 Units sold ………………………………………………………………………………9,000 Direct materials used ………………………………
> On January 1, 2017, Manuel Company’s merchandise inventory was $300,000. During 2017, Manuel purchased $1,900,000 of merchandise and recorded sales of $2,000,000. The gross profit margin on these sales was 20% of the selling price. What is Manuel’s merch
> The following information relates to Zulu Company’s accounts receivable for 2017: Accounts receivable, 1/1/2017 ………………….………………….…………………. $ 750,000 Credit sales for 2017 ………………….………………….………………….………………….3,100,000 Accounts written off during 2017 ………………….…
> On January 1, 2017, Wade Crimbring, Inc., a dealer in used manufacturing equipment, sold a CNC milling machine to Fletcher Bros., a new business that plans to fabricate utility trailers. To conserve cash, Fletcher paid for the machine by issuing a $200,0
> Weaver, Inc., received a $60,000, six-month, 12% interest-bearing note from a customer. The note was discounted (sold) the same day to Third National Bank at 15%. Compute the amount of cash Weaver received from the bank.
> Lake Company sold some machinery to View Company on January 1, 2017, for which the cash selling price was $758,200. View entered into an installment sales contract with Lake at a 10% interest rate. The contract required payments of $200,000 a year over f
> a. On January 1, 2017, Frances Corporation started doing business and the owners contributed $200,000 capital in cash. b. The company paid $24,000 to cover the rent for the office space for the 24-month period from January 1, 2017, to December 31, 2018.
> Robertson, Inc., manufactures metal products. As part of the manufacturing process, metal shavings are produced. Rather than disposing of the metal shavings, Robertson sells them to a metal recycler. Draft a memo discussing whether Robertson’s sale of me
> The following information is available for Fess Company: Credit sales during 2017 ………………….………………….…………………. $150,000 Allowance for doubtful accounts at December 31, 2016 ………………….1,450 Accounts receivable deemed worthless and written off during 2017………………
> Echo Corporation had the following balances immediately prior to writing off a $100 uncollectible account: Current assets ………………â
> At the close of its first year of operations on December 31, 2017, Clemens Company had accounts receivable of $300,000, which were net of the related allowance for doubtful accounts. During 2017, the company had charges to the provision for bad debts of
> Central Valley Construction (CVC) purchased $80,000 of sheet metal fabricating equipment from Buffalo Supply on January 1, 2017. CVC paid $15,000 cash and signed a five-year, 10% note for the remaining $65,000 of the purchase price. The note specifies th
> Smithfield Farms purchased a combine from John Deere for $175,000 on January 2, 2017. Smithfield paid $25,000 in cash and signed an installment note calling for five annual payments of $39,569.58 beginning on December 31, 2017. Deere based the payments o
> Binsford, Inc., sells $175,000 of its accounts receivable ($172,000 net of the allowance for doubtful accounts) to Upshaw Finance with recourse. Upshaw immediately remits cash equal to 90% of the gross receivable amount and retains the remaining 10% to c
> On December 31, 2017, Fenton Company sold equipment to Denver, Inc., accepting a $275,000 noninterest-bearing note receivable in full payment on December 31, 2017. Denver, Inc., normally pays 12% for its borrowed funds. The equipment is carried in Fenton
> Blue, Inc., sells playground equipment to schools and municipalities. It mails invoices at the end of each month for all goods shipped during that month; credit terms are net 30 days. Sales and accounts receivable data for 2017, 2018, and 2019 follow: R
> Kendall Corporation designs and manufactures sports cars. During the course of its business, Kendall generates substantial receivables from its customers. On July 1, 2017, to improve its cash flow, Kendall establishes a securitization entity (SE) and (1
> Pogrund Vacation Properties sells real estate in Florida. Pogrund requires potential buyers who are interested in a property to remit a $10,000 deposit to show good faith before receiving detailed information about a property. The deposit is fully refund
> For the month of December 2017, Ranger Corporation’s records show the following information: Cash received on accounts receivable……………………………. $35,000 Cash sales ………………….………………….………………….…………………. 30,000 Accounts receivable, December 1, ………………….…………………. 80
> Wilson Corporation repairs rail cars for its clients, a process that often takes several months. As a result, the work on some contracts is done over two accounting periods. Wilson is determining whether it will be able to recognize revenue on such contr
> Why do regulators require banks and insurance companies to maintain minimum levels of investor capital? What impact does this type of regulatory requirement have on the financial statements that banks and insurance companies prepare for shareholders?
> Illinois Power & Heat just spent $5 million repairing one of its electrical generating stations that was damaged by a tornado. The loss was uninsured. Management has asked the public service commission for approval to treat the $5 million as an asset for
> Some public service commission’s let utilities include construction in progress—construction dollars spent for projects not yet completed—in their rate-making asset bases. Other states allow only completed projects to be included. Which approach favors s
> What are regulatory costs, and why are they important for understanding a company’s financial reporting choices?
> McDonald’s, the global fast-food restaurant giant, was sued in 2009 by a former employee who said she was dismissed because, as a senior director of executive compensation, she objected to a complex scheme to keep country club fees paid for a top executi
> Sunshine Groceries operates a rapidly expanding chain of retail grocery stores in Europe. The company has grown from 10 stores in 2015 to 50 stores in 2017 and plans to add at least 10 stores each year for the next three years. Top executives at the comp
> The debt covenants in TCBY’s loan agreement do not mention explicitly the accounting methods the company must use when it prepares financial statements for submission to the lender. Why don’t lenders require the use of specific accounting methods rather
> What are the advantages of loan agreements that contain covenants tied to accounting numbers? Are there any disadvantages? Explain.
> For each of the following independent scenarios, determine whether Van Allen Corporation is a principal or an agent for purposes of applying the 5-step revenue recognition model. 1. Van Allen is a broker facilitating the sale of goods and will receive a
> Krafty Kris, Inc., discovered the following errors after the 2017 financial statements were issued: a. A major supplier shipped inventory valued at $8,550 to Krafty Kris on consignment. This merchandise was mistakenly included in the inventory taken by K
> Suppose you and two friends each invested $100,000 in an oil and gas partnership. The general partner, Huge Gamble, Inc., invests no cash but makes all operating decisions for the partnership, including where and how deep to drill for oil. Drilling costs
> What is a debt covenant? Why do lenders include them in loan agreements? Why do borrowers agree to include covenants in loan agreements?
> One of the practical expedients included in ASC Topic 606 relates to retroactive application of the standard when there is variable consideration. Generally, firms must revise their estimates of the amount of revenue the firm expects to be entitled to re
> In October 2010, Moody’s Investors Services reduced the credit rating assigned to Greece’s government bonds from investment grade to a speculative (junk-level) rating. At the time, Greece was considered by many to be the epicenter of the European debt cr
> Halifax Products has a $1 million bank loan that comes due next year. Management has prepared cash flow forecasts for each of the next six quarters as shown in the table below. Planned capital expenditures are intended to replace failing manufacturing eq
> 1. Define the term quality of earnings. 2. List the techniques that management can use to improve a company’s reported earnings performance in the short run. 3. Give examples of low-quality earnings components.
> 1. Why is fair value accounting so important to companies such as News Corporation that have substantial investments in goodwill recorded on their balance sheets? 2. News Corporation uses a discounted free cash flow valuation approach when assessing good
> The price/earnings ratios of four companies from the same industry are: What factors might explain the difference in the P/E ratios of these companies? Company P/E Ratio 16.3 19.7 33.7 Fresh Market Kroger Sprouts Farmers Market Whole Foods Market 2
> The price/earnings ratios of four companies from different industries are: What factors might explain the difference in the P/E ratios of these companies? Company P/E Ratio Amazon.com 882.7 Microsoft 35.2 Toyota Motors 9.3 Whole Foods Market 21.3
> Shelter Products sells portable livestock shelters to hog producers in the Central and Midwest regions of the United States. The terms of sale require cash payment within 30 days, and most customers take full advantage of this payment option. Sales are s
> Lemon Corporation and Morley, Inc., have entered into an arrangement whereby Lemon will supply materials and 1,000 hours of its scientists’ time for a project to be undertaken at Morley’s research facility in Austin, TX. Morley will also contribute its s
> 1. What does the phrase sustainable earnings mean? What types of earnings are not sustainable? 2. What are abnormal earnings? 3. Briefly describe the key features of the abnormal earnings approach to valuation.
> The quarterly cash flows from operations for two software companies are Required: 1. Explain why Firm B has more credit risk than Firm A. 2. Suppose that Firm B’s cash flow was $200 higher each quarter (e.g., $336.7 in Q1 of 2016). Ex
> 1. What are free cash flows? 2. Explain the difference between a company’s operating cash flow and its free cash flow. 3. Briefly describe the key features of the free cash flow approach to valuation.
> On January 1, 2019, LeMoyne Construction Company signs a contract to build an office building for Franklin Corporation for $10 million. Franklin remits $1 million to LeMoyne upon signing the contract, $5 million when the foundation and all outside compon
> Selected information taken from the accounting records of Vigor Company follows: Net accounts receivable at December 31, 2016 ……………………………………$ 900,000 Net accounts receivable at December 31, 2017 ……………………………………$1,000,000 Accounts receivable turnover ………
