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 contracts over time and therefore record a portion of the revenue on such contracts before returning the rail cars to the clients. Wilson’s controller has determined that its repairs enhance an asset the customer controls, and therefore Wilson may recognize revenue over time. Wilson’s auditor disagrees with Wilson’s interpretation, arguing that the customer does not control the asset until Wilson returns it. After all, the auditor says, “the customer cannot use or derive any benefit from a rail car that is not in its possession.” The auditor suggests that Wilson re-read ASC paragraph 606-20-25-25, which states Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by: a. Using the asset to produce goods or provide services (including public services) b. Using the asset to enhance the value of other assets c. Using the asset to settle liabilities or reduce expenses d. Selling or exchanging the asset e. Pledging the asset to secure a loan f. Holding the asset. In addition to his argument that the customer does not control the asset, the auditor notes that Wilson has the ability to prevent others, including the customer, from directing the use of the asset until the repairs are completed and paid for. “The customer does not control the rail car while it is being repaired, Wilson Corporation does.” Draft a memo describing which of the interpretations is correct and why.
> 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 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
> 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
> 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 ………
> A comparison of 2017 to 2016 performance shows that Neir Company’s inventory turnover increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements best explains the increased inventory turnove
> Gil Corporation has current assets of $90,000 and current liabilities of $180,000. Required: Compute the effect of each of the following independent transactions on Gil’s current ratio: 1. Refinancing a $30,000 long-term mortgage with a short-term note.
> Following are income statements for Hossa Corporation for 2017 and 2016. Percentage of sales amounts are also shown for each operating expense item. Hossa’s income tax rate was 38% in 2016 and 40% in 2017. Hossa’s ma
> This exercise is built around Whole Foods Market’s financial statements from the chapter. Average common shareholders’ equity for 2012 was $3.397 billion, and a 40% income tax rate should be used as needed. Required: 1. Whole Foods earned an ROA of 9.7%
> Mentor Graphics Corporation, a supplier of electronic design automation systems, just announced its second quarter results. According to the earnings press release, the company reported “revenues of $182.6 million, non-GAAP earnings per share of $0.02, a
> Following is Crash Zone Corporation’s balance sheet at the end of 2016 and its cash flow statement for 2017. Crash zone manufactures safety equipment for race cars. Additional Information: a. During 2017, 500 shares of common stock wer
> The Hershey Co. is famous worldwide for its chocolate confections—the Hershey bar and those delightful Hershey Kisses. Tootsie Roll Industries is equally famous for its chewy Tootsie Roll and those flavorful Tootsie Roll Pops. Selected
> Serven Corporation has estimated its accrual-basis revenue and expenses for June 2017 and would like your help in estimating cash disbursements. Selected data from these estimated amounts are as follows: Sales ………………………………………………………………………………………………………$700
> The following information is available from Sand Corporation’s accounting records for the year ended December 31, 2017: Cash received from customers…………………………………… $870,000 Rent received ………………………………………………………10,000 Cash paid to suppliers and employees ……
> During 2017, Kew Company, a service organization, had $200,000 in cash sales and $3,000,000 in credit sales. The accounts receivable balances were $400,000 and $485,000 at December 31, 2016 and 2017, respectively. Required: What was Kew Company’s cash re
> Mystery Technologies, Inc., a hypothetical company, is a leading manufacturer of bar code scanners and related information technology whose stock is traded on the New York Stock Exchange. In Year 3, the SEC filed allegations that during the previous five
> Following is a list of items taken from the December 31, 2017, balance sheet of Reagan Company (amounts omitted): Accounts payable ………………………………………………………Goodwill Accrued expenses ………………………………………………………Income taxes payable Accumulated depreciation—buildings
> The preliminary draft of the balance sheet at the end of the current fiscal year for Eagle Industries follows. The statement will be incorporated into the annual report to stockholders and will present the dollar amounts at the end of both the current an
> The following information was taken from the 2017 financial statements of Zurich Corporation, a maker of fine Swiss watches: Net income …………………$(200,000) Depreciation …………………50,000 Increase (decrease) in Accounts receivable ………………… (140,000) Inventories
> The following information was taken from the 2017 financial statements of Eiger Corporation, a maker of equipment for mountain and rock climbers: Net income ……………………………………$100,000 Depreciation ……………………………………30,000 Increase (decrease) in Accounts receivab
> The following classification scheme typically is used in the preparation of a balance sheet: a. Current assets b. Investments and funds c. Property, plant, and equipment d. Intangible assets e. Other assets f. Current liabilities g. Long-term liabilities
> Riff Hospital recently treated an accident victim in the emergency room. Because the patient was unconscious when he arrived, Riff treated the patient without knowing whether he had insurance or, if he did, whether it was with an insurer with which Riff
> Theo Corporation entered into a contract with Maddon Company to sell Maddon goods for $200,000. About a week later, Maddon ordered additional goods and the two companies agreed to a $50,000 price. The stand-alone price for the additional goods is typical
> Theo Corporation entered into a contract with Maddon Company to sell Maddon goods for $200,000. About a week later, Maddon ordered additional goods and the two companies agreed to a $50,000 price. Then the two companies agreed, for simplicity, to add the
> Kruger Corporation sells construction equipment to a customer for $50,000. The equipment comes with a standard 2-year warranty covering any repairs that are required during that time. It does not cover routine maintenance, and the warranty is voided if t
> The following information related to Caterpillar’s inventories is taken from its 2015 annual report. Use this information in answering the questions that follow. There were no LIFO liquidations in 2014 or 2015. Assume a 35% tax rate. D.
> For several years, the Securities and Exchange Commission (SEC) has been considering whether to transition U.S. firms to International Financial Reporting Standards (IFRS) for filing public financial reports. During 2011, Matthew J. Foehr, the vice presi
> ClearOne Communications, Inc., is a provider of end-to-end video and audio conferencing services, including the manufacture and sale of video and audio conferencing products. From its inception as a manufacturer of this equipment through 2001, ClearOne s
> Baines Corporation manufactures fireplace tools and accessories. It has been prosperous since its incorporation in 1980, largely due to a small, exceptionally skilled, and highly motivated managerial staff. Baines has been able to attract and retain its
> The following information related to ExxonMobil’s inventories is taken from its 2014 annual report. 3. Miscellaneous Financial Information In 2014, 2013, and 2012, net income included gains of $187 million, $282 million, and $328 millio
