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2. A company lost its entire inventory in a fire. Some accounting records were recovered, but the perpetual inventory records were destroyed. Over the past 3 years the company's average gross profit ratio has been 40%. The information for the current period was obtained from accounting records. Net sales $840,000, Beginning inventory $70,000, Net purchases $515,000.
Net Sales $840,000
Beginning inventory $70,000
Net purchases $515,000
Required:
A- Determine the estimated cost of the inventory lost in the fire. Show all calculations.
Since Gross Profit Ratio = 40%, then Cost of Goods Sold = 60%
= $840,000 × 60%
= $504,000 (This is the cost of inventory that is lost in the fire)
Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold
= $70,000 + $515,000 - $504,000
= $81,000
B- Assume the estimated value of the inventory was $67,800 and the company received $50,000 from their insurer in full settlement of the loss. Prepare the required journal entry.
Cash $50,000
Loss On Insurance Settlement $17,800
Inventory $67,800
1. Below are several accounts from a company's trial balance at the year end December 31st. Sales revenue $44,000, Accounts payable 1,500, Cash 5,600, Salaries expense 2,200, Dividends 4,000, Depreciation expense 1,000, Supplies expense 2,200, Cost of goods sold 28,000, Retained earnings, Jan1 10,000, Accounts receivable 8,200, Rent expense 2,100, Prepaid rent 1,500, Salaries payable 800, Utilities expense 3,600, Supplies 900, Interest revenue 200.
Prepare all necessary year-end closing entries. Why are these closing entries necessary?
|General Journal |
|Date |Account Titles |Debit |Credit |
|Closing Entries |
|Dec. 31 |Revenue |$44,200 | |
| | Income Summary | |$44,200 |
| | | | |
| |Income Summary |$38,800 | |
| | Cost of Goods Sold | |$28,000 |
| | Salaries Expense | |$2,900 |
| | Depreciation Expense | |$2,200 |
| | Mt Expense | |$2,100 |
| | Utilities Expense | |$3,600 |
| | | | |
| |Income Summary |$5,400 | |
| | Retained Earnings | |$5,400 |
Closing entries transfer the temporary account balances to the permanent stockholders' equity account--retained earnings. In addition to that, Closing Entries produce a zero balance in each temporary account; as a result, these accounts are ready to accumulate data about revenues, expenses, and dividends in the next accounting period separate from the data in prior periods.
2. A company lost its entire inventory in a fire. Some accounting records were recovered, but the perpetual inventory records were destroyed. Over the past 3 years the company's average gross profit ratio has been 40%. The information for the current period was obtained from accounting records. Net sales $840,000, Beginning inventory $70,000, Net purchases $515,000.
Net Sales $840,000
Beginning inventory $70,000
Net purchases $515,000
Required:
A- Determine the estimated cost of the inventory lost in the fire. Show all calculations.
Since Gross Profit Ratio = 40%, then Cost of Goods Sold = 60%
= $840,000 × 60%
= $504,000 (This is the cost of inventory that is lost in the fire)
Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold
= $70,000 + $515,000 - $504,000
= $81,000
B- Assume the estimated value of the inventory was $67,800 and the company received $50,000 from their insurer in full settlement of the loss. Prepare the required journal entry.
Cash $50,000
Loss On Insurance Settlement $17,800
Inventory $67,800
3. A company issued 10 year bonds with a par value of $20,000,000 and an 8% annual face on 01/02/2008. The issue price of the bond issue was $19,866,397 which reflected an 8.1% effected interest rate.
A- Prepare the journal entry to record the issuance of the bonds.
Cash $19,866,397
Discount on Bonds Payable $133,603
Bonds Payable $20,000,000
B- Give the journal entry to record the recognition of interest expense at December 31, 2008. Any premium or discount should be amortized using the effective interest rate method.
The entry to record the payment of interest and amortization of bond discount:
Bonds Interest Expense………. $1,609,178
Discount on Bonds Payable………… $9,178
Cash ……………… $1,600,000
Part B:
1. Explain the link between the statement of retained earnings and the balance sheet.
The bottom line of the Statement of Retained Earnings is the Retained Earning Ending Balance; this amount is transferred to the Balance Sheet as part of the Stockholders’ Equity Section.
2) Can a company with frequent and material bad debt expense use the direct write-off method rather than the allowance method to account for bad debts ? Explain why or why not.
No, because the Direct Write-off method has a serious shortcoming in that it violates the Matching Principle. Under the direct write-off method, bad debts expense is often recorded in a period different from the period in which the revenue was recorded. No attempt is made to match bad debts expense to sales revenues in the income statement. Nor does the direct write-off method show accounts receivable in the balance sheet at the amount actually expected to be received. Consequently, unless bad debts losses are insignificant, the direct write-off method is not acceptable for financial reporting purposes.
3) Explain the difference between authorized, issued, and outstanding shares of stock.
Authorized Shares are the number of shares a corporation can issue as per the Charter.
Issued Shares, are the number of shares actually issued by a corporation.
Outstanding Shares, are the number of shares that are currently outstanding. This is because a corporation might have issued 10,000 shares, then repurchased 5,000 shares, the number of shares issued would be 10,000, but the number of shares outstanding will only be 5,000 shares.
4) A company completed the following purchase transactions during April. Credit terms for all purchases are 1/10, n/30. The company uses the periodic inventory system.
April 1 Purchased merchandise on credit for 7,000
April 30 Paid for the April 1 purchase
Prepare the required journal entries.
|April 1 |Inventory |$7,000 | |
| | Accounts Payable | |$7,000 |
|April 30 |Accounts Payable |$7,000 | |
| | Cash | |$7,000 |
5) What is meant by the term "cash flow adequacy"? What comparisons would users of financial information look at to make proper use of the cash flow adequacy ratio?
The Cash Flow Adequacy measures how well the company can cover the annual payments of all the long-term annual debt with the cash flow from its operating activities.
This performance ratio should usually have a value of 1.0, which would mean the company is able to at least cover its long-term annual debt using its Cash Flow from Operating Activities. Occasionally a company may have more long-term annual debt, as they may make take on debt to handle emergencies or to fund expansions of its operations, but if the company is continually borrowing more over time than it can reasonably handle with its inflow of cash, then this might point to rough times ahead for the company.
6) Several years ago, a company purchased a patent and has since been amortizing it on a straight-line basis over its estimated useful life. The company's comparative balance sheets contain the following items:
December 31 December 31
2008 2007
Patent, less accumulated amortization of $70,000 $52,500
$280,000 $297,500
How much amortization expense was recorded during 2008? Show your calculations.
Amortization Expense recorded in 2008 =
Accumulated Amortization for 2008 - Accumulated Amortization for 2007
= $70,000 - $52,500
= $17,500
7) Calculate the inventory turnover ratio for 2008 and 2007, rounded to one decimal, from the following data:
2008 2007 2006
Total assets $1,205,000 $952,000 $945,000
Cost of goods sold 360,000 420,000 440,000
Inventory 56,000 64,000 53,000
Net income 65,000 25,000 16,000
Inventory Turnover = [pic]
For 2008:
Inventory Turnover = [pic] = 6 Times
For 2007:
= [pic]= 7.2 Times
8) Write a brief description of the double-entry system of bookkeeping.
Since each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction debits must equal credits in the accounts. The equality of debits and credits provides the basis for the double-entry system of recording transactions. Under the double-entry system the dual (two-sided) effect of each transaction is recorded in appropriate accounts. This universally used system provides a logical method for recording transactions. It also offers a means of proving the accuracy of the recorded amounts. If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must equal the sum of all the credits.
9) An accounting firm is preparing financial statements for a company that has had a lawsuit filed against it. Legal counsel for the company has assured the accounting firm a loss isn't probable. How should the lawsuit be disclosed on the financial statements?
If the contingency is remote (if it is unlikely to occur), it need not be recorded or disclosed.
10) Rocky's Cars, Inc. started the year with total assets of $400,000 and total liabilities of $185,000. Net income for the year is $65,000 and dividends declared and paid during the year are $20,000. What is the amount of Rocky's total stockholders equity at the end of the year? Show your calculations.
The stockholders equity at the beginning of the year is total assets-total liabilities =400,000-185,000=215,000
Stockholders Equity at the end of the year = Stockholders Equity at the beginning + net income – dividends
Equity at end = 215,000+65,000-20,000=$260,000
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