5 – 24

Determine account balances: percent of revenue allowance method of accounting for uncollectible accounts.

 

Accounts receivable balance, January 1, 2012                $52,500

Allowance for doubtful accounts, January 1, 2012            4,725

Sales on account, 2012                                                        925,000

Cost of goods sold, 2012                                                          615,000

 

After several collection attempts. Leslie’s wrote off $3,100 of accounts that could not be collected. Leslie’s estimates that bad debts expense will be 0.5 percent of sales on account.

 

Required

Compute the following amounts.

a. Using the allowance method, the amount of uncollectible accounts expense for 2012.

1. Net realizable value of receivables at the end of 2012.

b. Explain why the uncollectible accounts expense amount is different from the amount that was written off as uncollectible.

  

5 – 26   

Determination of account balances —percent of receivables allowance method of accounting for uncollectible accounts

 During the first year of operation, 2012. Martin’s Appliance recognized $292,000 of service revenue on account. At the end of 2012, the accounts receivable balance was $57,400. Even though this is his first year in business, the owner believes he will collect all but about 4 percent of the ending balance.

 

 

Required

a. What amount of cash was collected by Martin’s during 2012?

b. Assuming the use of an allowance system to account for uncollectible accounts, what amount should Martin record as uncollectible accounts expense, 2012?

c. Show the effect of the above transactions on the financial statements by recording the appropriate amounts in a horizontal statements model like the one shown here. When you record amounts in the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA), The letter NA indicate that an element is not affected by the event.

Asset

=

Liab

+

Equity

Rev

–

Exp

=

Net Inc.

Cash Flow

 

 

Problem 6 – 27 Computing and recording units of production depreciation

McNabb Corporation purchased a delivery van for $25,500 in 2012. The firm’s financial condition immediately prior to the purchase is shown in the following horizontal statement model.

Assets

=

Equity

Rev

–

Exp.

=

Net Inc.

Cash Flow

Cash

+

Book Value

=

Com. Stk

+

Ret. Earn

50,000

+

NA

=

50,000

+

Na

NA

–

NA

=

NA

NA

 

The van was expected to have a useful life of 150,000 miles and a salvage value of $3,000. Actual mileage was as follows:

2012                   50,000

2013                   70,000

2014                   58,000

Required

Compute the depreciation for each of the three years, assuming the use of units of production depreciation.

Assume that McNabb earns $21,000 of cash revenue during 2012. Record the purchase of the van and recognition of the revenue and the depreciation expense for the first year in a financial statements model like the preceding one.

Assume that McNabb sold the van at the end of the third year for $4,000. Calculate the amount of gain or lose from the sale.

 

Problem 6 – 28  Determining the effects of depreciation expense on financial statements

Three different companies each purchased a machine on January 1, 2012, for $54,000. Each machine was expected to last five years or 200,000 hours. Salvage value was estimated to be $4,000. All three machines were operated for 50,000 hours in 2012. 55,000 hours in 2013, 40,000 hours in 2014, 44,000 in 2015, and 31,000 hours in 2016. Each of the three companies earned $30,000 of cash revenue during each of the five years. Company A uses straight line depreciation, company B uses double declining balance depreciation, and company C uses units of production depreciation.

Required

Answer each of the following questions. Ignore the effects of income taxes.

Which company will report the highest amount of net income for 2012?

Which company will report the lowest amount of net income for 2014?

Which company will report the highest book value on the December 31, 2014, balance sheet?

Which company will report the highest amount of retained earnings on the December 2015, balance sheet?

Which company will report the lowest amount of cash flow from operating activities on the 2014 statement of cash flows?

 

6 – 32

Accounting for intangible assets

Mia-Tora Company purchased a fast food restaurant for $1,400,000. The fair market value of the assets purchased were as follows. No liabilities were assumed.

Equipment                       $320,000

Land                                    200,000

Building                              650,000

Franchise (5-year life)     100,000

 

Required

 

Calculate the amount of goodwill purchased.

 

 

 

 

 

GAAP & Ethics

Read ATC 6-5 exercise in the back of the chapter and answer part a.  Additionally, given what you have learned about financial accounting so far, think of as many ways that you could “adjust” the financial records to make your company look better yet still follow GAAP and ethical guidelines.  (Hint: think of the choices that can be used in the various accounting methods you have learned:  i.e., inventory valuation methods.)

ATC 6-5 Ethical Dilemma What’s an expense?

Several years ago, Wilson Blowhard founded a communications company. The company became successful and grew by expanding its customer base and acquiring some of its competitors. In fact, most of its growth resulted from acquiring other companies. Mr. Blowhard is adamant about continuing the company’s growth and increasing its net worth. To achieve these goals, the business’s net income must continue to increase at a rapid pace.

 If the company’s net worth continues to rise, Mr. Blowhard plans to sell the company and retire. He is, therefore, focused on improving the company’s profit any way he can.

In the communications business companies often use the lines of other communications companies. This line usage is a significant operating expense for Mr. Blowhard’s company. Generally accepted accounting principles require operating costs like line use to be expensed as they are incurred each year. Each dollar of line cost reduces net income by a dollar.

After reviewing the company’s operations, Mr. Blowhard concluded that the company did not currently need all of the line use it was paying for. It was really paying the owner of the lines now so that the line use would be available in the future for all of Mr. Blowhard’s expected new customers. Mr. Blowhard instructed his accountant reluctantly followed Mr. Blowhard’s instruction and the company’s net income for the current year a significant increase over the prior year’s net income. Mr. Blowhard had found a way to report continued growth in the company’s net income and increase the value of the company.

 

Required

 

a.      How does Mr. Blowhard’s scheme affect the amount of income that the company would otherwise report in its financial statements and how does the scheme affect the company’s balance sheet? Explain your answer