On April 1, 2017, Jiro Nozomi created a new travel agency, Adventure Travel. The following transactions occurred during the company’s first month.

The company's chart of accounts follows:

Use the following information:

1. Two-thirds (or $150) of one month’s insurance coverage has expired.
2. At the end of the month, $600 of office supplies are still available.
3. This month’s depreciation on the computer equipment is $500.
4. Employees earned $370 of unpaid and unrecorded salaries as of month-end.
5. The company earned $2,300 of commissions that are not yet billed at month-end.

Required:
1. & 2. Prepare journal entries to record the transactions for April and post them to the ledger accounts in Requirement 6b. The company records prepaid and unearned items in balance sheet accounts.
3. Using account balances from Requirement 6b, prepare an unadjusted trial balance as of April 30.
4. Journalize and post the adjusting entries for the month and prepare the adjusted trial balance.
5a. Prepare the income statement for the month of April 30, 2017.
5b. Prepare the statement of retained earnings for the month of April 30, 2017.
5c. Prepare the balance sheet at April 30, 2017.
6a. Prepare journal entries to close the temporary accounts and then post to Requirement 6b.
6b. Post the journal entries to the ledger.
7. Prepare a post-closing trial balance.

The company Smart Inc. is a company that produces T-shirts in Toronto area. The results of the company which has been mediocre for the past couple of years have been presented in the annual financial statement.

Sales (1 million units x 16$) 16 000 000$

Fixed Costs (10 000 000)

Variable Costs (1 million units x 10$) (10 000 000)

Depreciation (3 000 000)

Annual Profit (loss) (7 000 000)

According to the experts, this loss has been caused by the poor performance of the equipment in the factory. They suggest to the board of directors to replace the old equipment by new ones. Considering following information, the board of directors asks you to evaluate this project for the company.

• The new equipments would increase the level of production and allow the company to avoid this loss entirely, but there is no projection concerning any profit. The purchase (including the installation) of the new equipment requires an initial investment for an amount of 18 000 000$. The old equipment can be sold in the beginning of project on the market for 1 500 000$ (For simplification, consider this amount as an exchange value).

• The new equipment will be sold for 2 000 000$ in 10 years (end of project). The purchase of the equipment requires a new issue of long term bonds with a coupon rate of 8% over 10 years. The project also requires major renovation of the old building for the amount of 500 000$ and an additional investment in heavy machinery for the total amount of 1 000 000$ at the end of 5^th year (Both amounts are depreciable with declining method under the tax law).
• The project requires the purchase of a land for 1 200 000$ which will be sold in 10 years (end of project) for 2 200 000$. Suppose that at this moment 50% of capital gains are tax-free under tax law.

• The company also has to build a new building for an amount of 2 400 000$ which will be sold at the end of the project for 3 200 000$. This amount is depreciable with declining method.

• The project also requires an additional investment in new Computers and furniture for a total amount of 400 000$ in the beginning of project. Computers and furniture have to be replaced by new ones after 5 years for the amount of 600 000$. The do not have any salvage value.

• At the present time, supplier account and client account are at 1 000 000$ each. The project would increase client account and decrease supplier account by 50%. All related accounts will return to zero at the end of project.

• At the present time, Smart Inc is renting a warehouse for the annual rent of 50 000$ (paid at the end of year). If the company undertakes the new project, they will need to cancel the lease of the old warehouse and to rent a larger warehouse for the annual rent of 200 000$ (to be paid annually at the end of each year). The cancellation of the old lease does not cause any penalty.

• The project also requires 5 new technicians today with annual salary of 60 000$ for each and 5 other technicians in 5 years for annual salary of 75 000$ each. Given the performance of new equipment, Smart Inc could lay off 80 employees whose annual salaries is 40 000$. The lay-offs will oblige the company to pay lay-off premiums in the amount of 10 000$ to each employee which will be tax deductible.

The corporate tax rate is at 40%. The new equipment and new heavy machinery are in the category with a depreciation of 20%, the major renovations are depreciated at 25%, the new building is depreciated at 10%, all items depreciations are calculated with decreasing (declining) method. The computers and furniture are depreciated by linear method at 20%. Investors require 12% return on this type of project. Given this information, answer the following questions:

Questions:

1. Identify ONE BY ONE each item of the investment and calculate separately the present value of the total investment in this project.
2. Identify ONE BY ONE and calculate separately the present value of each periodical cash flow (annual incomes and expenses) during the project.
3. Identify ONE BY ONE and calculate separately the present value of each cash flow of the end of the project.
4. Calculate the Net Present Value of this project (You just have to add up your responses in 1, 2 and 3 for this one).
5. Calculate the maximum price that Smart Inc can afford to invest in the new equipment in the beginning of project in order to keep the project profitable. (That means the additional investment at the end of 5^th year and other items in the initial investment remain the same).
6. Calculate the Operational Cash Flow (OCF) of the 3^rd year of this project.

El Gato Painting Company maintains a checking account at American Bank. Bank statements are prepared at the end of each month. The November 30, 2018, reconciliation of the bank balance is as follows:

The company’s general ledger checking account showed the following for December:

The December bank statement contained the following information:

The checks that were processed by the bank in December include all of the outstanding checks at the end of November except for check #365. In addition, there are some December checks that had not been processed by the bank by the end of the month. Also, you discover that check #411 for $540 was correctly recorded by the bank but was incorrectly recorded on the books as a $450 disbursement for advertising expense. Included in the bank’s deposits is a $2,900 deposit incorrectly credited to the company’s account. The deposit should have been posted to the credit of the Los Gatos Company. The NSF checks have not been redeposited and the company will seek payment from the customers involved.

Required:
1. Prepare a bank reconciliation for the El Gato checking account at December 31, 2018.
2. Prepare any necessary adjusting journal entries indicated.

What trends did you notice? What implications do they have?

The text states, "Over sufficiently long time periods, net income equals cash inflows minus cash outflows, other than cash flows with owners." Demonstrate the accuracy of this statement in the following scenario: Two friends contributed $50,000 each to form a new business. The owners used the amounts contributed to purchase a machine for $100,000 cash. They estimated that the useful life of the machine was five years and the salvage value was $20,000. They rented out the machine to a customer for an annual rental of $25,000 a year for five years. Annual cash operating costs for insurance, taxes, and other items totaled $6,000 annually. At the end of the fifth year, the owners sold the equipment for $22,000, instead of the $20,000 salvage value initially estimated. (Hint: Compute the total net income and the total cash flows other than cash flows with owners for the five-year period as a whole.)

totals $ $ $ $

33. $____________Revenue:                                           37. $__________Supplies:                               

34. $____________Net Income:                                      38. $__________Total Assets:                        

35. $____________Issuance:                                           39. $__________Stockholders’ Equity:         

36. $____________Dividends:                                         40. $__________Total L & SE:        

Michelle J. and Fred M. Smith are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Michelle’s birthday is September 21, 1971, and Fred’s is June 27, 1970. They live at 473 Revere Avenue, Stony Brook, 01850. Michelle is the office manager for Stony Brook Dental Clinic, 433 Broad Street, Stony Brook, NY 01850 (employer identification number 98-7654321). Fred is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111).


The following information is shown on their Wage and Tax Statements (Form W–2) for 2018.

The Smiths provide over half of the support of their two children, Cynthia (born January 25, 1994, Social Security number 123-45-6788) and John (born February 7, 1998, Social Security number 123-45-6786). Both children are full-time students and live with the Smiths except when they are away at college. Cynthia earned $6,200 from a summer internship in 2018, and John earned $3,800 from a part-time job.


During 2018, the Smiths provided 60% of the total support of Fred’s widower father, Sam Smith (born March 6, 1942, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Fred, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $1,600,000 on December 28.


The Smiths had the following expenses relating to their personal residence during 2018:

•                    When they filed their 2017 state return in 2018, the Smiths paid additional state income tax of $900.

•                    During 2018, Michelle and Fred attended a dinner dance sponsored by the Stony Brook Police Disability Association (a qualified charitable organization). The Smiths paid $300 for the tickets. The cost of comparable entertainment would normally be $50.

•                     The Smiths contributed $5,000 to Stony Brook Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition.

•                     Via a crowdfunding site (gofundme.com), Michelle and Fred made a gift to a needy family who lost their home in a fire ($400). In addition, they made several cash gifts to homeless individuals downtown (estimatedto be $65).

•                     In 2018, the Smiths received interest income of $2,750, which was reported on a Form 1099–INT from Second National Bank, 125 Oak Street, Stony Brook, NY 01850 (Employer Identification Number 98-7654322).

•                     The home mortgage interest was reported on Form 1098 by Stony Brook Commercial Bank, P.O. Box 1000, Stony Brook, NY 01850 (Employer Identification Number 98-7654323). The mortgage (outstanding balance of $425,000 as of January 1, 2018) was taken out by the Smiths on May 1, 2014.

•                    Michelle’s employer requires that all employeeswear uniforms to work. During 2018, Michelle spent $850 on new uniforms and $566 on laundry charges.

•                     Fred paid $400 for an annual subscription to the Journal of Franchise Managementand $741 for annual membership dues to his professional association.

•                    Neither Michelle’s nor Fred’s employer reimburses for employee expenses.

•                     The Smiths do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.

•                     All members of the Smith family had health insurance coverage for all of 2018.

•                     This year the Smiths gave each of their children $2,000, which was then deposited into their Roth IRAs.

•                    Michelle and Fred paid no estimated Federal income tax. Neither Michelle nor Fred wants to designate $3 to the Presidential Election Campaign Fund.

REQUIRED: Tax Computation


Prepare their Federal and NYS tax returns. Compute net tax payable or refund due for Michelle and Fred Smith for 2018. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computations, you will need Forms 1040 and Schedules A and B.


You must prepare Form 1040, Schedules A & B and any other appropriate forms and schedules.  You may use tax software such as ProConnect or TurboTax, or manually prepare their tax returns.

Prepare their Federal and NYS income tax returns. Assume they were NYS residents for the entire year

Milden Company has an exclusive franchise to purchase a product from the manufacturer and distribute it on the retail level. As an aid in planning, the company has decided to start using a contribution format income statement. To have data to prepare such a statement, the company has analyzed its expenses and has developed the following cost formulas:

Management has concluded that shipping expense is a mixed cost, containing both variable and fixed cost elements. Units sold and the related shipping expense over the last eight quarters follow:

Milden Company’s president would like a cost formula derived for shipping expense so that a budgeted contribution format income statement can be prepared for the next quarter.

2. In the first quarter of Year 3, the company plans to sell 35,000 units at a selling price of $56 per unit. Prepare a contribution format income statement for the quarter. (Do not round your intermediate calculations.)

Pacific Rim Industries is a diversified company whose products are marketed both domestically and internationally. The company’s major product lines are furniture, sports equipment, and household appliances. At a recent meeting of Pacific Rim’s board of directors, there was a lengthy discussion on ways to improve overall corporate profitability. The members of the board decided that they required additional financial information about individual corporate operations in order to target areas for improvement.

Danielle Murphy, the controller, has been asked to provide additional data that would assist the board in its investigation. Murphy believes that income statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into corporate operations. Murphy had several discussions with the division managers for each product line and compiled the following information from these meetings.

1. The division managers concluded that Murphy should allocate fixed manufacturing overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.

2. Each of the division managers agreed that a reasonable basis for the allocation of depreciation on plant and equipment would be the ratio of units produced per product line (or per geographical area) to the total number of units produced.

3. There was little agreement on the allocation of administrative and selling expenses, so Murphy decided to allocate only those expenses that were traceable directly to a segment. For example, manufacturing staff salaries would be allocated to product lines, and sales staff salaries would be allocated to geographic areas. Murphy used the following data for this allocation.

4. The division managers were able to provide reliable sales percentages for their product lines by geographical area.

Murphy prepared the following product-line income statement based on the data presented above.

Required:

1. Prepare a segmented income statement for Pacific Rim Industries based on the company’s geographical areas. The statement should show the operating income for each segment. (Do not round your intermediate calculations and round your final answers to the nearest dollar amount.)

Range Energy Corp.’s financial statements for the current year ended December 31, 2017, have been completed and submitted to you for review. The equity account balances a year ago, at December 31, 2016, are as follows:

The only share transactions during 2017 were the declaration and distribution of a 28,000 common share dividend on July 1 and the issuance of 18,000 common shares for cash on October 31. The company’s 2017 profit was $630,880. A cash dividend on the preferred shares was declared on December 1, but was not paid as of December 31. Earnings per share for 2017 were calculated as follows:

Required:
1-a. The earnings per share is incorrect. Indicate what changes should be made to the numerator and the denominator?

Exercise 194

The financial statements of Lowz Company appear below:

Prepare a statement of cash flows for Lowz Company using the direct method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

The deduction for a contribution to a retirement plan for an owner of a sole proprietorship is not taken on Schedule C.

Select one:

True

False

Question 6

Not yet answered

Points out of 1.00

Flag question

Question text

Assuming Lee owns a dog grooming business, which is a sole proprietorship, and he has net self employment income of $100,000 and he pays SE tax of $16,000 (assumed), the most that he can contribute to a Keogh plan is $25,000.

Select one:

True

False

Question 7

Not yet answered

Points out of 1.00

Flag question

Question text

Assuming Fred owns a fire arms training business, which is a sole proprietorship, and he has net self employment income of $140,000 and he pays SE tax of $20,000 (assumed), the most that he can contribute to a Keogh plan is $26,000.

Select one:

True

False

Question 8

Not yet answered

Points out of 1.00

Flag question

Question text

Partnerships can have special allocations in which income is allocated disproportionately to ownership

Select one:

True

False

Question 9

Not yet answered

Points out of 1.00

Flag question

Question text

A family limited partnership generally separates the value of the business equally between the general partner(s) and the limited partners.

Select one:

True

False

Question 10

Not yet answered

Points out of 1.00

Flag question

Question text

One of the benefits of a FLP is that transfers of the limited partnership interests can be completed at a substantial valuation discount.

Select one:

True

False